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Can Naked Exclusion Be Procompetitive?

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  • Gratz, Linda
  • Reisinger, Markus
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    Abstract

    Antitrust scholars have argued that exclusive contracts have anticompetitive, or at best neutral effects, if no efficiencies are generated. In contrast, this paper shows that exclusive contracts can have procompetitive effects, provided buyers are imperfect downstream competitors and contract breach is feasible. In that case an efficient entrant is not necessarily foreclosed through exclusive contracting but induces buyers to breach. Because breaching buyers have to pay expectation damages to the incumbent, the downstream profits they obtain when breaching must be large enough. Therefore, the entrant needs to set a lower wholesale price than absent exclusive contracting, leading to lower final consumer prices and higher welfare.

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    File URL: http://epub.ub.uni-muenchen.de/12733/1/Gratz_Reisinger_2011_Can_Naked_Exclusion_Be_Procompetitive.pdf
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    Bibliographic Info

    Paper provided by University of Munich, Department of Economics in its series Discussion Papers in Economics with number 12733.

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    Date of creation: Feb 2012
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    Handle: RePEc:lmu:muenec:12733

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    Related research

    Keywords: Exclusive Contracting; Naked Exclusion; Contract Breach; Antitrust Policy;

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    1. Yong, Jong-Say, 1999. "Exclusionary Vertical Contracts and Product Market Competition," The Journal of Business, University of Chicago Press, vol. 72(3), pages 385-406, July.
    2. Fumagalli, Chiara & Motta, Massimo, 2002. "Exclusive Dealing and Entry, when Buyers Compete," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3493, C.E.P.R. Discussion Papers.
    3. Bonanno, Giacomo & Vickers, John, 1988. "Vertical Separation," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 36(3), pages 257-65, March.
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