COMPETITIVE EXCLUSION IN CATEGORY CAPTAIN ARRANGEMENTS Working Monograph1 Gregory T. Gundlach Coggin Distinguished Professor of Marketing University of North Florida & Senior Fellow American Antitrust Institute [email protected] and Alex G. Loff Researcher University of North Florida [email protected] August 30, 2018 1 We thank Riley T. Krotz, Ph.D. Student, University of Tennessee, for his helpful comments and suggestions in the preparation of this monograph. 1 COMPETITIVE EXCLUSION IN CATEGORY CAPTAIN ARRANGEMENTS Table of Contents PREFACE .................................................................................................................................. 5 CHAPTER 1. INTRODUCTION ............................................................................................ 6 CHAPTER 2. CATEGORY MANAGEMENT .................................................................... 12 DEFINITION AND NATURE ......................................................................................................................... 12 OBJECTIVES AND GOALS ............................................................................................................................. 13 ORIGIN AND DEVELOPMENT ..................................................................................................................... 14 PERSPECTIVE AND APPROACH ................................................................................................................... 15 OPERATION AND MANAGEMENT .............................................................................................................. 16 ADOPTION AND SCOPE ............................................................................................................................... 17 TRENDS AND INFLUENCES ......................................................................................................................... 17 BENEFITS AND EFFICIENCIES ..................................................................................................................... 18 CHAPTER 3. CATEGORY CAPTAIN ARRANGEMENTS ............................................... 21 NATURE AND SCOPE .................................................................................................................................... 21 SELECTION AND STRUCTURE ...................................................................................................................... 23 GOVERNANCE AND COMPENSATION ........................................................................................................ 25 ROLES AND RESPONSIBILITIES ................................................................................................................... 27 MOTIVATIONS AND GOALS ......................................................................................................................... 31 OUTCOMES AND VALUE .............................................................................................................................. 35 CHAPTER 4. KEY SOURCES OF CONCERN FOR CATEGORY CAPTAIN ARRANGEMENTS ................................................................................................................ 40 FACIAL REDUCTION OR ELIMINATION OF COMPETITION ...................................................................... 40 INHERENT CONFLICTS OF INTEREST ......................................................................................................... 41 OPPORTUNITIES FOR SELF-INTEREST SEEKING ...................................................................................... 43 POTENTIAL FOR SUBTLE FORMS OF OPPORTUNISM ................................................................................ 45 CHAPTER 5. THE POWER OF CATEGORY CAPTAINS ................................................ 46 TYPES OF POWER .......................................................................................................................................... 46 Market (i.e., horizontal) power ..................................................................................................................... 46 Interfirm (i.e. vertical) power ......................................................................................................................... 47 Interplay of market and interfirm power ........................................................................................................ 47 SOURCES OF POWER ..................................................................................................................................... 48 Market-based sources .................................................................................................................................... 49 Interfirm-based sources .................................................................................................................................. 51 Role of information asymmetries .................................................................................................................... 53 DIMENSIONS OF POWER .............................................................................................................................. 55 Continuum of power and practice .................................................................................................................. 55 Context and structure of power ...................................................................................................................... 57 Dynamics and evolution of power .................................................................................................................. 59 CHAPTER 6. EXCLUSIONARY CONDUCT AND PRACTICES BY CATEGORY CAPTAINS .............................................................................................................................. 60 2 DENYING OTHERS FROM COMPETING FOR THE CATEGORY CAPTAIN ROLE ...................................... 62 RECEIVING AND MISUSING RIVALS’ SENSITIVE INFORMATION ............................................................. 63 Sharing information with others in the captain’s organization ........................................................................ 65 Sharing information with other suppliers ....................................................................................................... 65 ENGAGING IN IMPROPER RECOMMENDATIONS AND RELATED ACTIONS ........................................... 66 Recommendations to remove or reduce rivals’ products .................................................................................... 67 Exclusive dealing .......................................................................................................................................... 70 Tortious conduct against rivals ...................................................................................................................... 72 DISADVANTAGING RETAILER’S STORE BRANDS AND THE SUPPLIERS OF STORE BRANDS ................. 73 CHAPTER 7. MANAGERIAL SAFEGUARDS AGAINST EXCLUSION IN CATEGORY CAPTAIN ARRANGEMENTS ............................................................................................. 74 SAFEGUARDS INVOLVING ALTERNATIVE CATEGORY CAPTAIN ARRANGEMENTS .............................. 75 No category captain ...................................................................................................................................... 76 Co-captains, validators, advisors, and nonleader captains ............................................................................... 77 Third party advisors and consultants ............................................................................................................. 78 Hybrid arrangements .................................................................................................................................... 79 SAFEGUARDS AGAINST DENYING OTHERS FROM COMPETING FOR CATEGORY CAPTAIN ROLE ...... 80 Insuring that other suppliers are considered for the role ................................................................................... 80 Prohibitions on payments and negotiated arrangements .................................................................................. 80 Termination clauses, discontinuance rights, and time limits ............................................................................ 81 SAFEGUARDS AGAINST A CATEGORY CAPTAIN RECEIVING AND MISUSING RIVALS’ SENSITIVE INFORMATION ............................................................................................................................................... 81 Firewalls and controls on sharing information ................................................................................................ 81 Confidentiality requirements and protections .................................................................................................. 82 Prohibitions on the receipt, disclosure, and use of information ......................................................................... 83 Selection criteria and confidentiality assessments ............................................................................................. 83 SAFEGUARDS AGAINST A CATEGORY CAPTAIN ENGAGING IN IMPROPER RECOMMENDATIONS AND RELATED ACTIONS ....................................................................................................................................... 83 Requirements of objectivity and impartiality ..................................................................................................