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Understanding Exclusive Sponsorship Contracts PDF Print

Printed in the Business Monday newspaper on July 26th, 2010 

With the Crop Over season in high gear and much demand for event sponsorship, one issue that commands attention is exclusive sponsorship, where sponsors insist that businesses promote their products exclusively at events and venues.

The Fair Competition Act as enforced by the Fair Trading Commission prohibits the establishment of exclusive sponsorship arrangements if these arrangements lead to a substantial restriction of competition.

Sponsors often attempt to limit or deny businesses from granting similar promotional opportunities to rivals for the same event. The sponsor normally seeks to accomplish this by insisting upon a degree of exclusivity within the contract whereby the business hosting the event is restrained from dealing with the sponsor’s rivals. The extent of the exclusivity demanded is often dependent on the measure of financial input the sponsor is willing to provide.

There are a number of advantages and disadvantages of exclusive contracts.

Advantages

  • Exclusive contracts are generally seen as useful pro-competitive business arrangements because they result in benefits to competition. These contracts often allow specialisation in a particular product such as improvements in the production and distribution of products. For example:
  • Exclusive contracts are often recognised as a useful means of guarding against “free riding”. Free riding can occur where one manufacturer or sponsor seeks to take advantage of another manufacturer’s sales efforts. This can occur in circumstances where rival manufacturers use the same distributor to sell their products, and one manufacturer expends substantial investment in advertising the product or in developing the distributor (for example through training). Other rival manufacturers may then seek to capitalise or “free ride” on the improved qualities of the distributor to sell their own products.
  • Exclusive contracts also serve to assure the supplier or sponsor of a guaranteed outlet for its output. The exclusive arrangement reassures the supplier that competitors will not be able to easily access his outlets. Sometimes considerable investment is required to develop a product and where the manufacturer is relatively certain of an outlet for that product, he is more likely to make the required investment. The alternative is also true in that an exclusive contract assures the outlet or retailer of a guaranteed source of supply. Exclusive arrangements are useful means of allowing a new entrant to penetrate a market, whilst being insulated from full competition.
  • Exclusive sponsorship creates for the supplier an additional resource for promotion of its brand. Where terms are imposed on a distributor, it often forces that distributor to become an advocate for a particular brand.

Disadvantages

  • Apart from the economic benefits to the parties involved, under competition law these types of sponsorship arrangements are of concern to the extent that they lead to the substantial restriction of competition in particular markets.
  • By enticing, or forcing a dealer to exclude the competing products of rival firms, competition within a particular market may be restricted. While these arrangements preserve the narrow interests of the sponsor, competing businesses seeking an outlet to distribute their products may be excluded by such arrangements.
  • Restriction of competition is not only of concern to those businesses prevented from marketing their products around an event, but it also restricts the choices of those consumers who may prefer other brands to those available under the exclusive arrangement.
  • In addition exclusive contracts, by eliminating that competitive element which forces businesses to seek to outperform their rivals, causes inefficiency to creep into particular markets often leading to a reduced quality of product and higher prices.

Implications for Fair Competition

When sponsorship complaints come before the Commission, an assessment of the likely impact of the exclusive arrangement on the relevant market is considered. If the arrangement means that some competitors will be denied for a fixed, relatively short period of time which does not prevent them from accessing all the other opportunities available to market their product, then such a situation is not deemed unfair.

If the arrangement relates to the only venue in the market, or a string of major venues, over a number of years and with an option for first refusal, then the restrictive effect on competitors would be far more substantial. Where arrangements of this magnitude are being considered, the Commission reviews them to measure the potential reduction in competition.

Notwithstanding the above, where the conduct is being undertaken by a dominant enterprise, or where it leads to a substantial disruption of competition, exclusive arrangements are recognised as being useful to business operations in general.

 
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