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Exclusive Dealing and Entry

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Author Info
João Leão (MIT - Department of Economics, ISCTE - Department of Economics and UNIDE-ERC)
Abstract

This paper examines the use of exclusive dealing agreements to prevent the entry of rival firms. An exclusive dealing agreement is a contract between a buyer and a seller where the buyer commits to buy a good exclusively from the seller. One main concern of the literature is to explain how an incumbent seller is able to persuade the buyers to sign an exclusive dealing agreement that deters the entry of a more efficient rival seller. We propose a new explanation when the buyers are downstream firms and both the seller and the buyers face the threat of entry. In this case, the entry of more efficient upstream seller, by decreasing the market power of the upstream firms, can make entry in the downstream market more attractive. This can lead to further entry in the downstream market and to an increase in the competition faced by the downstream firms. Since part of the bigger surplus created by the entry of a more efficient seller is now captured by the downstream entrant firms, entry in the upstream market does not necessarily benefit the incumbent downstream firms.

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File URL: http://erc.unide.iscte.pt/wpi/ERCwp2408.pdf
File Format: application/pdf
File Function: First version, 2008
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Publisher Info
Paper provided by ISCTE, UNIDE, Economics Research Centre in its series Working Papers with number ercwp2408.

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Length: 24 pages
Date of creation: Jun 2008
Date of revision:
Handle: RePEc:isc:wpaper:ercwp2408

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  1. Aghion, Philippe & Bolton, Patrick, 1987. "Contracts as a Barrier to Entry," American Economic Review, American Economic Association, vol. 77(3), pages 388-401, June.
  2. Rasmusen, Eric B & Ramseyer, J Mark & Wiley, John S, Jr, 1991. "Naked Exclusion," American Economic Review, American Economic Association, vol. 81(5), pages 1137-45, December. [Downloadable!] (restricted)
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This page was last updated on 2009-11-26.

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