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Selective Contracts, Foreclosure, and the Chicago School View

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  • Stefanadis, Christodoulos

Abstract

I examine a mechanism by which exclusive supply contracts may inefficiently deter entry into the market. In the model, the incumbent supplier selectively offers contracts only to some buyers and convinces them to consent by guaranteeing them low prices. The contracts strengthen the monopoly position of the incumbent supplier and allow it to extract rents from the remaining buyers that were not offered contracts. Aside from the favorable contract terms, buyers have another reason to consent to the exclusivity scheme: the latter raises the input costs of rival buyers that were not offered contracts. The model has potential applications to the recent Microsoft antitrust case (1994). I define exclusive supply contract as an agreement under which an upstream firm becomes the exclusive supplier of a downstream firm; the downstream firm is prohibited from buying from other suppliers. Copyright 1998 by the University of Chicago.

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Law & Economics.

Volume (Year): 41 (1998)
Issue (Month): 2 (October)
Pages: 429-50

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Handle: RePEc:ucp:jlawec:v:41:y:1998:i:2:p:429-50

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Web page: http://www.journals.uchicago.edu/JLE/

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Cited by:
  1. Aggey Semenov & Julian Wright, 2011. "Vertical Limit pricing," Working Papers 1104E, University of Ottawa, Department of Economics.
  2. Aggey Semenov & Julian Wright, 2011. "Entry deterrrence via renegotiation-proof non-exclusive contracts," Working Papers 1105E, University of Ottawa, Department of Economics.
  3. Gans, Joshua S. & King, Stephen P., 2002. "Exclusionary contracts and competition for large buyers," International Journal of Industrial Organization, Elsevier, vol. 20(9), pages 1363-1381, November.
  4. Christodoulos Stefanadis, 2003. "Sunk Costs, Contestability, and the Latent Contract Market," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 12(1), pages 119-138, 03.
  5. Barna Bakó, 2012. "Exclusive contracts with vertically differentiated products," Economics Bulletin, AccessEcon, vol. 32(2), pages 1312-1319.
  6. Zhang, Mingxia & Sexton, Richard J., 2000. "Captive Supplies And The Cash Market Price: A Spatial Markets Approach," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 25(01), July.
  7. Chiara Fumagalli & Massimo Motta, 2006. "Exclusive Dealing and Entry, when Buyers Compete," American Economic Review, American Economic Association, vol. 96(3), pages 785-795, June.
  8. Gratz, Linda & Reisinger, Markus, 2013. "On the competition enhancing effects of exclusive dealing contracts," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 429-437.
  9. Mikko Packalen, 2011. "Market Share Exclusion," Working Papers 1103, University of Waterloo, Department of Economics, revised Aug 2011.
  10. MacDonald, James M. & Perry, Janet E. & Ahearn, Mary Clare & Banker, David E. & Chambers, William & Dimitri, Carolyn & Key, Nigel D. & Nelson, Kenneth E. & Southard, Leland W., 2004. "Contracts, Markets, and Prices: Organizing the Production and Use of Agricultural Commodities," Agricultural Economics Reports 34013, United States Department of Agriculture, Economic Research Service.

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