Page 76 - Azerbaijan State University of Economics

STUDYING OF SPECIAL PRACTICAL ISSUES OF ABUSE OF DOMINANCE

violated if a manufacturer used vertical restraints - establishing, say, a

network of exclusive dealers - to better control costs and, as a result, expand
sales relative to smaller rivals. Higher-cost rivals would be disadvantaged by

the dealership network, but the (more efficient) exclusive network should not

be considered a violation of antitrust laws.
Another way in which vertical restraints might raise rivals’ costs and

hurt competition is the following. Suppose a dominant firm in a man-
ufacturing market possesses market power but is not a monopolist, that is, it

faces competition from other manufacturers, which restrains the price that
the manufacturer can charge its dealers. Suppose also that downstream

dealers typically carry products of many upstream manufacturers. Finally,

suppose that the manufacturer negotiates with its downstream dealers
contracts that contain vertical restraints - say, an exclusive dealing provision.

Unless rivals can find alternative dealers, the manufacturer’s exclusive

dealership network raises rivals’ costs of distributing products. Thus prices
paid by consumers for rival products increase, permitting the manufacturer

with the exclusive network to raise the wholesale price to its exclusive
dealership network. Consumers are hurt as a result.

Two additional points should be made about this vertical restraint.
First, there must be barriers to entry into the dealer market. If, instead,

services provided by a dealer in the exclusive network could be easily

replicated by other dealers (that is, barriers to entry are low), then costs of
the dominant firm's rivals would not increase and there would be no harm to

consumers.
Second, the competition agency must strive to link the exclusive

dealership network to higher costs incurred by the manufacturer's rivals. (In
some jurisdictions, profits lost are also taken into consideration.) This can be

difficult, but it must be done to distinguish an anticompetitive use of vertical

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