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Exclusive Quality

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  • Argenton, Cédric

    ()
    (Dept. of Economics, Stockholm School of Economics)

Abstract

It is shown in this study that in the case of vertically differentiated products, Bertrand competition at the retail level does not prevent an incumbent upstream firm from using exclusivity contracts to deter the entry of a more efficient rival, contrary to what happens in the homogenous product case. Indeed, because of differentiation, the incumbent's inferior product is not eliminated upon entry. As a result, a retailer who considers rejecting the exclusivity clause expects to earn much less than the incumbent's monopoly rents. Thus, in equilibrium, the incumbent can always offer high enough an upfront payment to induce all retailers to sign on the contract.

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File URL: http://swopec.hhs.se/hastef/papers/hastef0640.pdf
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Bibliographic Info

Paper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 640.

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Length: 37 pages
Date of creation: 18 Oct 2006
Date of revision: 17 Nov 2006
Handle: RePEc:hhs:hastef:0640

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Keywords: vertical differentiation; contracts; exclusion; monopolization;

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References

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  1. Farrell, Joseph, 2005. "Deconstructing Chicago on Exclusive Dealing," Competition Policy Center, Working Paper Series, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley qt9wv3k43c, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
  2. Ching-to Albert Ma, 1995. "Option Contracts and Vertical Foreclosure," Papers, Boston University - Industry Studies Programme 0061, Boston University - Industry Studies Programme.
  3. Hart, O. & Tirole, J., 1990. "Vertical Integration And Market Foreclosure," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 548, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Crampes, C. & Hollander, A., 1992. "Duopoly and Quality Standards," Papers, Toulouse - GREMAQ 92.g, Toulouse - GREMAQ.
  5. Bernheim, B.D., 1992. "Exclusive Dealing," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1622, Harvard - Institute of Economic Research.
  6. Rey, Patrick & Tirole, Jean, 2007. "A Primer on Foreclosure," Handbook of Industrial Organization, Elsevier, Elsevier.
  7. Rasmusen, Eric B & Ramseyer, J Mark & Wiley, John S, Jr, 1991. "Naked Exclusion," American Economic Review, American Economic Association, American Economic Association, vol. 81(5), pages 1137-45, December.
  8. Jaskold Gabszewicz, J. & Thisse, J. -F., 1979. "Price competition, quality and income disparities," Journal of Economic Theory, Elsevier, Elsevier, vol. 20(3), pages 340-359, June.
  9. Ordover, Janusz A & Saloner, Garth & Salop, Steven C, 1990. "Equilibrium Vertical Foreclosure," American Economic Review, American Economic Association, American Economic Association, vol. 80(1), pages 127-42, March.
  10. Aghion, Philippe & Bolton, Patrick, 1987. "Contracts as a Barrier to Entry," American Economic Review, American Economic Association, American Economic Association, vol. 77(3), pages 388-401, June.
  11. David Spector, 2007. "Exclusive contracts and demand foreclosure," PSE Working Papers halshs-00588311, HAL.
  12. Wauthy, X., 1994. "Quality Choice in Models of Vertical Differentiation," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales), Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) 1994033, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  13. Michael D. Whinston & Ilya R. Segal, 2000. "Naked Exclusion: Comment," American Economic Review, American Economic Association, American Economic Association, vol. 90(1), pages 296-309, March.
  14. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 49(1), pages 3-13, January.
  15. Chiara Fumagalli & Massimo Motta, 2006. "Exclusive Dealing and Entry, when Buyers Compete," American Economic Review, American Economic Association, American Economic Association, vol. 96(3), pages 785-795, June.
  16. Abito, Jose Miguel & Wright, Julian, 2008. "Exclusive dealing with imperfect downstream competition," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 26(1), pages 227-246, January.
  17. Uri Ronnen, 1991. "Minimum Quality Standards, Fixed Costs, and Competition," RAND Journal of Economics, The RAND Corporation, vol. 22(4), pages 490-504, Winter.
  18. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, Elsevier, vol. 18(2), pages 301-317, August.
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Citations

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Cited by:
  1. John Asker & Heski Bar-Isaac, 2011. "Exclusionary Minimum Resale Price Maintenance," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 11-22, New York University, Leonard N. Stern School of Business, Department of Economics.
  2. Hiroshi Kitamura & Noriaki Matsushima & Misato Sato, 2013. "How Does Downstream Firms' Efficiency Affect Exclusive Supply Agreements?," ISER Discussion Paper, Institute of Social and Economic Research, Osaka University 0878, Institute of Social and Economic Research, Osaka University.

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