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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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  • Stefanadis, Christodoulos, 1998. "Selective Contracts, Foreclosure, and the Chicago School View," Journal of Law and Economics, University of Chicago Press, vol. 41(2), pages 429-450, October.
    • Handle: RePEc:ucp:jlawec:v:41:y:1998:i:2:p:429-50
    DOI: 10.1086/467396
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    References listed on IDEAS

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    Cited by:

    1. Ajay Kalra & Shibo Li, 2008. "Signaling Quality Through Specialization," Marketing Science, INFORMS, vol. 27(2), pages 168-184, 03-04.
    2. 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.
    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. Luis Cabral, 2014. "Staggered Contracts, Market Power and Welfare," Working Papers 14-13, New York University, Leonard N. Stern School of Business, Department of Economics.
    5. Aggey Semenov & Julian Wright, 2011. "Entry deterrrence via renegotiation-proof non-exclusive contracts," Working Papers 1105E, University of Ottawa, Department of Economics.
    6. 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.
    7. Aggey Semenov & Julian Wright, 2011. "Vertical Limit pricing," Working Papers 1104E, University of Ottawa, Department of Economics.
    8. Christodoulos Stefanadis, 2003. "Sunk Costs, Contestability, and the Latent Contract Market," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 12(1), pages 119-138, March.
    9. 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(1), pages 1-21, July.
    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 Economic Reports 34013, United States Department of Agriculture, Economic Research Service.
    11. Barna Bakó, 2012. "Exclusive contracts with vertically differentiated products," Economics Bulletin, AccessEcon, vol. 32(2), pages 1312-1319.
    12. Upender Subramanian & Jagmohan S. Raju & Z. John Zhang, 2013. "Exclusive Handset Arrangements in the Wireless Industry: A Competitive Analysis," Marketing Science, INFORMS, vol. 32(2), pages 246-270, March.
    13. Mikko Packalen, 2011. "Market Share Exclusion," Working Papers 1103, University of Waterloo, Department of Economics, revised Aug 2011.
    14. Can Erutku, 2006. "Rebates as incentives to exclusivity," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 39(2), pages 477-492, May.

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