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EXCLUSIVE QUALITY -super-*

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  • C�DRIC ARGENTON

Abstract

In the case of vertically differentiated products, Bertrand competition at the retail level does not prevent an incumbent upstream firm from using exclusivity contracts to deter the entry of a high-quality rival. Indeed, because of differentiation, the incumbent's inferior product is not eliminated upon entry. Due to the resulting competitive pressure, a retailer who considers rejecting the exclusivity contract expects to earn much less than the incumbent's monopoly rents. Thus, in equilibrium, the incumbent can always offer high enough an upfront payment to induce all retailers to sign the contract and achieve exclusion. This is true under linear pricing for intermediate levels of entry costs, and with two-part tariffs even in the absence of entry costs. Copyright 2010 The Author. The Journal of Industrial Economics 2010 Blackwell Publishing Ltd. and the Editorial Board of The Journal of Industrial Economics.

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Article provided by Wiley Blackwell in its journal The Journal of Industrial Economics.

Volume (Year): 58 (2010)
Issue (Month): 3 (09)
Pages: 690-716

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Handle: RePEc:bla:jindec:v:58:y:2010:i:3:p:690-716

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