Exclusive contracts, often used in business arrangements to limit parties from engaging with competitors, can have both positive and negative effects on competition. While such agreements may reduce costs and prevent free riding, they can also be used by dominant firms to restrict rivals’ ability to compete effectively.
In markets known as two-sided platforms—where a company connects two different groups of customers—the impact of exclusive contracts can be more pronounced. These platforms benefit from indirect network effects: the value for one group increases as participation from the other group grows. For example, credit card networks become more valuable to cardholders when accepted by more merchants, and vice versa.
New entrants in these markets face a challenge known as the “chicken-and-egg” problem. They must attract enough customers on both sides of the platform simultaneously to reach critical mass and compete with established players. Exclusive contracts between an incumbent platform and its customers can prevent rivals from achieving this scale, making it difficult or impossible for new competitors to enter or expand.
This dynamic was central in the case of FTC v. Surescripts. The Federal Trade Commission (FTC) alleged that Surescripts maintained monopoly power in electronic prescription routing by using loyalty contracts that were effectively exclusive. Although most contracts did not explicitly require exclusivity, customers risked losing all discounts if they routed even a small share of transactions through a rival platform.
Surescripts operates in electronic health information exchange, particularly facilitating “routing” (transmitting prescriptions from prescribers’ electronic health records [EHRs] to pharmacies) and “eligibility” (sharing patient insurance information). As federal incentive programs encouraged adoption of electronic transactions starting in the late 2000s, Surescripts became one of the first companies to connect most EHRs and pharmacies nationwide.
The FTC’s complaint stated that by 2009, Surescripts had become an essential intermediary for routing transactions due to widespread connections on both sides of its platform. This created significant barriers for new entrants because the value each side derived depended heavily on how many participants were already connected—a classic network effect.
Surescripts offered lower per-transaction prices or higher incentive payments only if customers conducted nearly all their transactions through its system. According to the FTC, these terms made it costly for customers to use multiple platforms (“multi-home”), as diverting even a small fraction would result in forfeiting substantial discounts across millions of annual transactions.
A stylized example illustrates this barrier: If a pharmacy routes 100 daily transactions exclusively through Surescripts at four cents each but considers sending 10 through a rival (losing its discount), it would pay more overall unless the rival subsidizes those transactions at unsustainable rates. Because loyalty contracts existed on both sides—pharmacies and EHRs—the pool of contestable demand available to rivals shrank dramatically.
The FTC argued that these practices allowed Surescripts’ contracts to cover at least 95% of routing transactions, foreclosing much of the market from competitors such as Emdeon who offered lower prices and innovation.
During litigation, Surescripts sought summary judgment against the FTC’s claims while the FTC moved for partial summary judgment on market definition and monopoly power issues. The court sided with the FTC on both points, finding that Surescripts held a 95% market share since 2010 and possessed monopoly power given network dynamics. The judge deferred ruling on competitive effects but indicated it would be difficult for Surescripts to prevail.
Following these rulings, Surescripts agreed to settle with several conditions: it is now prohibited from using exclusivity or loyalty provisions requiring 50% or more customer commitment; cannot restrict customers’ ability to work with competitors; must avoid contract terms limiting competition; is barred from employee non-compete agreements; and must implement an antitrust compliance program.
The case demonstrates how loyalty discounts functioning as de facto exclusive contracts can raise entry barriers in two-sided markets affected by network effects, limiting competition despite not being formally exclusive agreements.
