Question

You are a manager of a paper producer. You buy the wood pulp necessary to produce paper from a number of local lumber mills. One day a couple of the managers of one of the mills come to you and offer to sell you all the wood pulp you need at a lower price than what you currently​ pay-but, only if you agree to buy all of your wood pulp from them.

What type of agreement are the managers​ proposing? Is the proposed contract definitely​ legal, definitely​ illegal, or somewhere in​ between?

a. The managers are proposing an exclusive dealing contract. The legality of the contract depends on whether the contract is in effect for so long that rival firms rarely get the opportunity to offer alternative bids.

b. The managers are proposing an exclusive dealing contract. This contract is definitely legal and procompetitive as both the producer and the distributor now have an incentive to promote the product.

c. The managers are proposing a requirements contract. The legality of the contract depends on how much market power and how many competitors the paper producer has.

d. The managers are proposing a requirements contract. This contract is definitely illegal as this substantially lessens competition by prohibiting you from engaging with other rival mills.

Answer 1

• Option A is correct.
• The managers are proposing an exclusive dealing contract.
• If the contract affects trade and competition in a severe manner and leads to monopoy, it might be considered illegal under the Section 2 of Sherman Act and Section 3 of the Clayton Act.
• Hence, the legality of the contract depends on whether the contract is in effect for so long that rival firms rarely get the opportunity to offer alternative bids and whether the contract leads to monopoly in the market under anti-trust laws.