By Atty. Amabelle C. Asuncion
August 14, 2019
IF there is one word in the lexicon that evokes special or expensive, or both, that would be the word “exclusive.” Attach exclusive to anything and it magically turns into something rare and highly coveted. A club, an event, a film screening, or an interview that is labeled exclusive straightaway sets itself apart and beyond reach. Making anything exclusive builds imaginary walls around it, multiplying its value because of the limited access. People are attracted to exclusives because this makes them feel special and marks them as insiders, assuring them of a place that they would otherwise have to fight for and best others if it were open to everyone. “Exclusivity” signifies a perk that grants access to something from which others are restricted, in exchange for some premium payment. While it can be commercially rewarding, it is rather elitist as it is selective and deliberately exclusionary.
In competition law, exclusionary practices are considered anticompetitive. Exclusionary practices are those that have the object or effect of driving out competition, that is, foreclosing competitors from entering or growing in the market. If a company enjoying a dominant market position engages in such conduct, then it is considered abuse of dominance that is violative of Section 15 of the Philippine Competition Act.
The most palpable example of exclusionary conduct is exclusive dealing arrangements. This can come in different forms, the most common of which are exclusive purchase agreements where a customer is bound to buy only from one supplier to the exclusion of the supplier’s competitors. It is like “exclusive dating,” as the youth of today calls it, where neither party is allowed to entertain other suitors, regardless if they could potentially find better partners. Just like in exclusive dating, an exclusive arrangement is usually explicitly agreed upon whereby the customer agrees not to deal with any other supplier. Where the supplier involved in an exclusive purchase agreement is a dominant player, limiting the customer’s ability to source its requirements from the supplier’s competitors could result in their exclusion or exit from the market. This would be especially true if the exclusivity arrangement is to be effective for a long period. At the same time, the customer is left with no options even when the supplier’s goods or services deteriorate in quality or increase in price.
A less apparent way of effecting exclusivity is by offering preferential discounts or rebates conditioned on purchasing exclusively from the supplier. To be sure, awarding rebates is in itself not anticompetitive. However, where the rebate is based on purchasing all or most of a customer’s requirements from the same supplier, it can be akin to an exclusivity arrangement. In such a case, the rebate will be considered as having the object or effect of restricting competition as it limits the customer’s ability or freedom to source its requirements from another supplier. The exclusionary effect becomes more patent when the supplier in question is a dominant player, which, in some situations, would even be an unavoidable trading partner as when it must stock products. In such a case, the rebate will most likely induce the customer to procure all its requirements from that supplier.
The nagging question from the business perspective, however, is when it impairs parties’ freedom to contract and ignores business considerations for wanting an exclusive arrangement. The plain response to this is that competition law is indeed a check on business judgment and freedom to contract. Companies are free to make business decisions and choose with whom to contract and under what terms, provided these are not anticompetitive.
The deeper rationale, however, is that exclusivity arrangements can drive out competition and harm consumers because, in a way, the supplier enjoys monopoly power over the captive customer. This could then translate to higher price levels, lower quality of goods or services, and limited consumer choice. This happens when the prestigious underpinnings commonly associated with the general concept of exclusivity are replaced with the oppressive consequences of a lock in arrangement.
Exclusivity arrangements are actually barriers to entry because the customer base is already reserved to the current market players. This prevents other market players from coming in and competing, even if they could potentially provide better goods or services at affordable prices. It perpetuates inertia as it encourages the current market players to relax because they are protected from the normal threat of their
customers being lured away.
At a time when most anything is a dime a dozen, the challenge is to distinguish oneself and rise above the others. There are many legitimate and creative ways to respond to this dare. Competition law emphasizes that the challenge is in fact to be a cut above the rest, not to cut off the rest.
Before her appointment to the Philippine Competition Commission, Commissioner Asuncion was engaged in corporate and commercial practice and served as chief legal counsel of a top company and a corporate partner of a law firm. She was also previously involved in legislative, law and policy reform, advocacy, and adjudication work. Commissioner Asuncion has a Master of Laws degree (with distinction) in International Legal Studies from Georgetown University Law Center in Washington, D.C., and is admitted to the New York bar.
(Originally published on Business Mirror’s Competition Matters column on August 14, 2019 here.)