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Equilibrium Incentives for Exclusive Dealing in a Differentiated Products Oligopoly

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Author Info
David Besanko
Martin K. Perry

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Abstract

We consider the incentives for oligopolistic manufacturers to adopt exclusive dealing. Manufacturers producing differentiated brands can choose to distribute through exclusive retail dealerships or nonexclusive dealerships. With nonexclusive dealing, manufacturers face an interbrand externality because brand-enhancing investments made by one manufacturer may benefit the brands of other manufacturers. Although exclusive dealing eliminates this externality, oligopolistic manufacturers may not choose exclusive dealing. Exclusive dealing enhances the incentive to invest, but the promotional investments are a form of competition between manufacturers. Thus, manufacturers might earn higher profits with nonexclusive dealing making lower promotional investments. We find cases in which nonexclusive dealing is a dominant strategy. We also find cases in which some, but not all, manufacturers adopt exclusive dealing. Moreover, even if adoption of exclusive dealing by all manufacturers is the equilibrium, it can arise from a prisoner's dilemma in that each manufacturer would prefer nonexclusive dealing.

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Publisher Info
Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 24 (1993)
Issue (Month): 4 (Winter)
Pages: 646-668
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Handle: RePEc:rje:randje:v:24:y:1993:i:winter:p:646-668

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  1. B. Douglas Bernheim & Michael D. Whinston, 1996. "Exclusive Dealing," NBER Working Papers 5666, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. John Asker, 2004. "Diagnosing Foreclosure Due to Exclusive Dealing," Working Papers 04-36, New York University, Leonard N. Stern School of Business, Department of Economics. [Downloadable!]
  3. Arora, Ashish & Fosfuri, Andrea, 1999. "Licensing the Market for Technology," CEPR Discussion Papers 2284, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  4. Chidmi, Benaissa & Lopez, Rigoberto A. & Cotterill, Ronald W., 2004. "Vertical Relationships In The Ready-To-Eat Breakfast Cereal Market: A Brand-Supermarket Level Analysis," 2004 Annual meeting, August 1-4, Denver, CO 19916, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). [Downloadable!]
  5. Michiel Bijlsma & Viktoria Kocsis & Victoria Shestalova & Gijsbert Zwart, 2008. "Vertical foreclosure, a policy framework," CPB Documents 157, CPB Netherlands Bureau for Economic Policy Analysis. [Downloadable!]
  6. Chrysovalantou Milliou, 2004. "Exclusive Dealing And Compatibility Of Investments," Economics Working Papers we044919, Universidad Carlos III, Departamento de Economía. [Downloadable!]
  7. Oana Secrieru, 2004. "The Economic Theory of Retail Pricing: A Survey," Working Papers 04-8, Bank of Canada. [Downloadable!]
  8. Boone, J. & Müller, W. & Suetens, S., 2009. "Naked Exclusion: Towards a Behavioral Approach to Exclusive Dealing," Discussion Paper 2009-30, Tilburg University, Center for Economic Research. [Downloadable!]
    Other versions:
  9. Verena Hahn, 2000. "Antitrust Enforcement: Abuse Control or Notification?," European Journal of Law and Economics, Springer, vol. 10(1), pages 69-91, July. [Downloadable!] (restricted)
  10. Fumagalli, Chiara & Motta, Massimo & Rønde, Thomas, 2009. "Exclusive dealing: the interaction between foreclosure and investment promotion," CEPR Discussion Papers 7240, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  11. Horst Raff & Nicolas Schmitt, 2004. "Exclusive Dealing and Common Agency in International Markets," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  12. Tommy Gabrielsen, 1996. "The foreclosure argument for exclusive dealing: The case of differentiated retailers," Journal of Economics, Springer, vol. 63(1), pages 25-40, February. [Downloadable!] (restricted)
  13. Stennek, Johan, 2007. "Exclusive Quality - Why Exclusive Distribution May Benefit the TV Viewers," CEPR Discussion Papers 6072, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  14. James D. Dana & Kathryn Spier, 2000. "Entry Deterrence in a Duopoly Model," Econometric Society World Congress 2000 Contributed Papers 1451, Econometric Society. [Downloadable!]
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