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Exclusive Dealing Contract and Inefficient Entry Threat

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  • Noriyuki Yanagawa

    (Faculty of Economics, University of Tokyo)

  • Ryoko Oki

    (Graduate School of Economics, University of Tokyo)

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    Abstract

    This paper examines the effects of exclusive dealing contracts in a simple model with manufacturers-distributors relations. We consider entrants in both manufacturing and distribution sectors. It is well-known that a potential entry threat is welfare increasing under homogenous price competition, even though the potential entrant is less productive. This paper reexamines this intuition by employing the above model. We show that the entry threat of a less-productive manufacturer is welfare decreasing when there is an exclusive dealing contract between the incumbent manufacturer and distributor. This result is in contrast to the view of the contestable markets literature.

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    File URL: http://www.carf.e.u-tokyo.ac.jp/pdf/workingpaper/fseries/137.pdf
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    Bibliographic Info

    Paper provided by Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo in its series CARF F-Series with number CARF-F-132.

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    Length: 21 pages
    Date of creation: Sep 2008
    Date of revision:
    Handle: RePEc:cfi:fseres:cf132

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    1. Fumagalli, Chiara & Motta, Massimo, 2002. "Exclusive Dealing and Entry, when Buyers Compete," CEPR Discussion Papers 3493, C.E.P.R. Discussion Papers.
    2. Michael D. Whinston & Ilya R. Segal, 2000. "Naked Exclusion: Comment," American Economic Review, American Economic Association, vol. 90(1), pages 296-309, March.
    3. Inderst, Roman & Shaffer, Greg, 2004. "Retail Mergers: Buyer Power and Product Variety," CEPR Discussion Papers 4236, C.E.P.R. Discussion Papers.
    4. Baumol, William J, 1982. "Contestable Markets: An Uprising in the Theory of Industry Structure," American Economic Review, American Economic Association, vol. 72(1), pages 1-15, March.
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