Industrial Organization: Contemporary Theory and Empirical Applications, 5th Edition

18

Non-Price Vertical Restraints

In May 2012, Penn State University completed an agreement that assigned Pepsi the exclusive “pouring rights” at every fountain and vending machine at each of the university's nineteen campuses across the state of Pennsylvania. For the next ten years, the only soft drinks served at every athletic event, theatrical performance, university ceremony, and in every university-authorized dining service, snack bar, and vending machine at every Penn State school will be Pepsi Cola and other Pepsi products such as Mountain Dew, Lipton iced teas, SoBe, Aquafina, Propel Zero, and Gatorade. The agreement followed a similar agreement between Pepsi and the University of Delaware, and is one of a number university “pouring rights” contracts that Pepsi has collected. Coca-Cola plays this game, too. It has recently concluded similar exclusive beverage contracts with the University of Minnesota and Ohio State University. These cola wars do not stop at the college level. By some estimates, 80 percent of public schools have exclusive “pouring contracts” with either Coke or Pepsi, and these extend not just to vending machines, cafeterias, and sports events but even to the drinks offered at fundraisers such as bake sales and book fairs.¹

The “pouring rights” contracts between schools and beverage companies are examples of non-price vertical restraints. In this case, the upstream manufacturer imposes a restriction on the downstream distributor. As noted in the previous ...