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Exclusive dealing: the interaction between foreclosure and investment promotion

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Author Info
Fumagalli, Chiara
Motta, Massimo
Rønde, Thomas

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Abstract

This paper studies a model where exclusive dealing (ED) can both promote investment and foreclose a more efficient supplier. While investment promotion is usually regarded as a pro-competitive effect of ED, our paper shows that it may be the very reason why a contract that forecloses a more efficient supplier is signed. Absent the effect on investment, the contract would not be signed and foreclosure would not be a concern. For this reason, considering potential foreclosure and investment promotion in isolation and then summing them up may not be a suitable approach to assess the net effect of ED. The paper therefore invites a more cautious attitude towards accepting possible investment promotion arguments as a defence for ED.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7240.

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Date of creation: Mar 2009
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Handle: RePEc:cpr:ceprdp:7240

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Related research
Keywords: Monopolization practices; Vertical agreements;

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Find related papers by JEL classification:
L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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    Other versions:
  3. Hermalin, Benjamin E & Katz, Michael L, 1993. "Judicial Modification of Contracts between Sophisticated Parties: A More Complete View of Incomplete Contracts and Their Breach," Journal of Law, Economics and Organization, Oxford University Press, vol. 9(2), pages 230-55, October.
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    Other versions:
  6. Groh, Christian & Spagnolo, Giancarlo, 2004. "Exclusive Contracts, Loss to Delay and Incentives to Invest," CEPR Discussion Papers 4525, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  7. Aghion, P. & Hermalin, B., 1990. "Legal Restrictions on Private Contracts Can Enhance Efficiency," DELTA Working Papers 90-14, DELTA (Ecole normale supérieure).
    Other versions:
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  14. B. Douglas Bernheim & Michael D. Whinston, 1998. "Exclusive Dealing," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 64-103, February. [Downloadable!] (restricted)
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  15. Kathryn E. Spier & Michael D. Whinston, 1995. "On the Efficiency of Privately Stipulated Damages for Breach of Contract: Entry Barriers, Reliance, and Renegotiation," RAND Journal of Economics, The RAND Corporation, vol. 26(2), pages 180-202, Summer. [Downloadable!] (restricted)
  16. Stole, Lars A, 1992. "The Economics of Liquidated Damage Clauses in Contractual Environments with Private Information," Journal of Law, Economics and Organization, Oxford University Press, vol. 8(3), pages 582-606, October.
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    Other versions:
  18. 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. [Downloadable!]
    Other versions:
  19. Ilya Segal & Michael D. Whinston, 2000. "Exclusive Contracts and Protection of Investments," RAND Journal of Economics, The RAND Corporation, vol. 31(4), pages 603-633, Winter.
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