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74 Antitrust L.J. 473 (2007)
The Expanded Economics of Free-Riding: How Exclusive Dealing Prevents Free-Riding and Creates Undivided Loyalty

handle is hein.journals/antil74 and id is 481 raw text is: THE EXPANDED ECONOMICS OF FREE-RIDING: HOW EXCLUSIVE DEALING PREVENTS FREE-RIDING AND CREATES UNDIVIDED LOYALTY BENJAMIN KLEIN ANDRES V. LERNER* I. INTRODUCTION Recent Section 2 exclusive dealing case law places increasing impor- tance on procompetitive justifications. While the minimum foreclosure share for antitrust liability under Sherman Act Section 1 and Clayton Act Section 3 has grown substantially over time, making it increasingly diffi- cult for plaintiffs to successfully challenge exclusive dealing contracts,' in a number of recent cases plaintiffs have successfully challenged exclusive contracts on Sherman Act Section 2 monopolization grounds without demonstrating Section 1 foreclosure when a dominant firm could not provide a procompetitive rationale for its use of exclusivity. Since exclu- sive dealing may in some cases misleadingly suggest behavior that inher- ently places rivals at a competitive disadvantage, the absence of a valid procompetitive justification may tip the balance of procompetitive justi- fications and anticompetitive effects towards Section 2 liability even when * The authors are, respectively, Professor Emeritus of Economics, UCLA and Director, LECG; and Director, LECG. Neither author has consulted on any of the cases analyzed in this article. An earlier version of this article was presented at the U.S. Department of Justice Antitrust Division and Federal Trade Commission Hearings Regarding Section 2 of the Sherman Act on November 15, 2006. The authors are indebted to David Reitman, andJournal editors Robert Robertson and Christopher Sprigman for comments on an ear- lier draft. I The recent decisions uniformly favor defendants where foreclosure levels are 40 percent or less .... Jonathan M. Jacobson, Exclusive Dealing, Foreclosure, and Consumer Harm, 70 ANTITRUST L.J. 311, 362 (2002) (citing cases at 325 n. 85). Moreover, exclusive dealing arrangements covering even greater shares of the market have been routinely upheld if the contracts are relatively short-term, with a number of courts concluding that exclusive contracts covering one year or less are presumptively lawful. See, e.g., Concord Boat Corp. v. Brunswick Corp., 207 F.3d 1039, 1059 (8th Cir. 2000); Omega Envtl. Inc. v. Gilbarco, Inc., 127 F.3d 1157, 1163-64 (9th Cir. 1997); Roland Mach. Co. v. Dresser Indus., 749 F.2d 380, 392-95 (7th Cir. 1984).

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