Wednesday, May 2, 2007

Antitrust Analysis of Category Management: Conwood v. U.S. Tobacco

Posted by D. Daniel Sokol

Josh Wright of George Mason Law School has expanded our knowledge on category management in a number of recent working papers.  His most recent paper on the topic, Antitrust Analysis of Category Management: Conwood v. U.S. Tobacco, examines the Conwood case.

ABSTRACT: Category management is a business practice whereby a retailer designates a manufacturer as a category manager or captain and gives the designated manufacturer authority concerning retail shelf space allocation within a product category. In return for shifting brand stocking decisions as well as promotion, product assortment, and inventory decisions to the designated manufacturer, the retailer receives a lower wholesale price or a per unit time payment from the manufacturer. This paper analyzes the antitrust law and economics of category management contracts, demonstrating that they are an element of the normal competitive process that benefits consumers and challenging the increased antitrust scrutiny that has been applied to such arrangements as exemplified by the Sixth Circuit's recent decision in Conwood Co. v. United States Tobacco Co. We show that the economics of category management contracts is not fundamentally different from exclusive shelf space contracts - control over the shelf space allocation decision is merely shifted from the retailer to a manufacturer with the manufacturer becoming the transactor that can violate the implicit contract and the retailer becoming the policer of the contract. Mistaken reasoning regarding fiduciary obligations and horizontal versus vertical contracts has led to the placement of greater antitrust scrutiny on category managers than on firms that have negotiated more restrictive fully exclusive distribution contracts.

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