Let's see an example about how exclusive dealing has worked.
This is the Coca-Cola and Pepsi refrigerator case.
Have you noticed that when you go to
the convenience store and you want to buy a beverage,
then Coca-Cola and Pepsi are held in separate refrigerators?
There is a different refrigerators for Coke drinks,
and a different one for Pepsi drinks.
Why does this happen?
Why does this happen all the time in every convenience store, in every country?
The most important reason,
for the success of those two brands, Coke and Pepsi,
was not so much that the recipe that they had was
so nice and so much better than anything else existed in the past.
Has to do also with the marketing that they're doing, the advertisement,
but one more factor,
the ingenious contractual agreements that they had with retailers and dealers.
So, the Coca-Cola company especially,
was the leader in creating contractual agreements that
will help in dominating specific markets.
Coca-Cola was the leader in implementing
contracts of exclusive dealing with distributors.
I remember when I was a kid and I was going to my mom's summer house in Greece,
they had a very small coffee shop there which sold beverages,
and they only sold Coca-Cola drinks,
Coca-Cola and other Coca-Cola company beverages.
They never had Pepsi.
So, some people they preferred Pepsi over Coke coming back
from Athens to this small summer place.
They would like to buy a Pepsi and then they would go to the store and they say,
"Hey, there is a big demand for Pepsi,
why don't you also bring Pepsi?"
And the guy that owned the store was very hesitant to talk.
But what actually happened was that,
Coca-Cola had a contract with the store that prohibited this particular store
from having serving any other competitive drinks to Coca-Cola.
So, Coca-Cola would have
exclusive dealing agreements straight up in countries where this was allowed by law,
or through some indirect ways like offers in the countries that this was not allowed.
For example, in the United States,
exclusive dealing was prohibited from the Clayton Act in 1914.
You could not require someone to not carry competitive products in their store.
This practice that Coca-Cola did,
the direct exclusive dealing or the indirect one,
this practice was quite effective in the 70s.
But towards the end of 70s,
the antitrust authorities started looking into such kinds of agreements.
They said maybe this create some excess market power and creates artificial barriers to
entry to other companies that they also want to come into
this industry and make the dead weight loss lower.
So, they started to seriously looking into these cases and soon,
Coca-Cola saw the FTC coming behind them and they said,
"Maybe we should stop doing that because we have
other open cases with them and let's try to be a little bit more careful."
So, they stopped doing offers for exclusive dealing.
Some people they say that they did that because they had
a very good alternative to the exclusive dealing agreements. What was that?
Free refrigerators.
If you have a convenience store,
buying a refrigerator is an extra cost,
the serious extra cost to the capital of your business.
Instead of doing exclusive dealing,
Coca-Cola decided to supply companies refrigerator,
refrigerators to those firms,
to small convenience stores, to kiosks,
or other smaller firms
that they would stock a sufficient amount of Coca-Cola soft drinks.
They said, "Listen, we're going to make you an offer.
If you store this much Coca-Cola drinks per month,
we're going to give you a free refrigerator now.
As long as you're buying that much from us,
you'll get to keep this refrigerator for free.
And not only keep it, but we're going to service it and
maintain it just for free for you."
However, there was one catch,
one term that no competing brands should be stored inside this refrigerator.
You could not get Coca-Cola's refrigerator and store Pepsi inside this refrigerator.
Coca-Cola was meticulous in monitoring these kind of agreements.
They had people that they would travel even to
the most remote places and check
if the owners of the store would obey the contract or not.
They would do that repeatedly so they will
enforce this kind of agreement with the owners.
This practice led effectively to exclusive dealing.
This was because of two reasons.
The first was space limitations,
especially in big cities where they are crucial for establishing a trend for the product.
Small retailers like kiosks, or convenience stores,
or small restaurants, or fast foods,
they did not have enough space to store more than one refrigerators.
Since Coca-Cola went there first and they caught the space with the Coca-Cola fridge,
Pepsi could not go after them and say,
"Oh, yeah, why don't you have another fridge?"
"Because I have not enough space to have different fridges here."
So, this effectively helped into a situation that reminds us of exclusive dealing.
A second reason is,
demand constraints, that is,
small retailers did not have enough sales so they will be able to cover
the necessary quantities that they should store in
order to get free fridges for more than one companies.
Coca-Cola will understand how much your demand is because in most of the cases,
they were selling to you before so they know how much you're selling.
And if you're selling, for example,
100 cans a day,
they will come to you and say,
if you buy 3,000 cans a month from us,
we'll give you a free fridge.
Meaning that, we'll cover your entire demand if you want the free fridge,
not leaving any more spaces for the competitors.
So, because of space limitation and demand constraints,
this method with the fridges was a very clever loophole that allowed Coca-Cola
to circumvent the antitrust law for an additional 40 years.
These were several billions of profit due to this trick.
However, eventually, you cannot get away with everything.
Eventually, you are going to be having to deal with the authorities.
Pepsi followed the policy but it came second.
The fridge trick became very big.
Other industries followed.
The ice cream industry will give you free freezers.
The beer companies will also give you free refrigerators.
Hard alcohol companies, even today,
they will give you different kind of gadgets, sometimes refrigerators.
Like the other day, I was at the nightclub,
of course doing research for this case,
and I saw that Jagermeister, this liquor,
will give you a very cool looking small fridge, so small freezer,
that supposedly keeps the drink to the minus,
I don't know how many degrees that it should be drink.
So, they give you this fridge,
you have to have it on the bar visible.
It's actually very cool for the decoration of the store also,
but this helps in the exclusive dealing.
You cannot have an infinite amount of those fridges
up there because you have again a space limitation.
Frozen foods also followed this trick and they will give
you their own freezers in which you could not store other brands in there.
The technique expanded to include other irrelevant items also.
So, they started a new campaign that they would give you store sign.
So they would write the name of your convenience store but in the two sides,
they would have like the Pepsi sign,
or the Fanta sign,
or the Coca-Cola sign,
or something like that.
Elaborate stands that they will get the sufficient amount of space in
your store and always a stand had to be full of the product.
And even gun companies,
companies that they were selling weapons,
they would follow this trick and they would give to gun stores,
they would give them a safe.
So, they supposedly keep the arms in the
safe in order to not be stolen or to look like they are so available to the customers.
And they were giving other merchandise in order to
cause this effect of the exclusive dealing which,
per se, was deemed illegal by the law.
In 2004, European Union effectively grounded the practice of the fridges.
The court ruled that sponsored fridges could be
used to store competitive brand products up to 20 percent of their capacity.
It was a big loss for the practice.
I told you before, you can get away with something for some time but not forever.
A fine to Coca-Cola for this case was never disclosed but there was litigation and there
was out of court compromise between Coca-Cola and the authorities.
And similar cases have been filed in other countries,
most prominently in Mexico,
for which also there is research.
So, exclusive dealing is a very effective technique but creates excess market power,
and the authorities, they do not really like that,
so they are after it.
However, firms, they try,
they always work on the margin of the law,
especially the most profitable firms.
They always work in the margin of the law and they try
to impose alternative policies that they create the same effect.
Another policy that we will talk in the next segment is
exclusive territories. Stay with us.
