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Exclusive dealing with network effects

  • Doganoglu, Toker
  • Wright, Julian

This paper explores the ability of an incumbent to use introductory offers to dominate a market in the face of a more efficient rival when network effects rather than scale economies are present. Both in the case of one-sided and two-sided markets, for introductory offers to be profitable when consumers can multihome, they need to be discriminatory and exclusive. In this setting, exclusivity as opposed to just commitment to purchase is critical -- consumers must commit not to purchase from the rival in the future in order that introductory offers can work. The use of such contracts is anticompetitive and inefficient but does not necessarily result in complete foreclosure.

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Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 28 (2010)
Issue (Month): 2 (March)
Pages: 145-154

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Handle: RePEc:eee:indorg:v:28:y:2010:i:2:p:145-154
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505551

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  1. Julian Wright, 2009. "Exclusive Dealing and Entry, When Buyers Compete: Comment," American Economic Review, American Economic Association, vol. 99(3), pages 1070-81, June.
  2. Jean-Charles Rochet & Jean Triole, 2002. "Platform Competition in Two Sided Markets," FMG Discussion Papers dp409, Financial Markets Group.
  3. Fumagalli, Chiara & Motta, Massimo, 2002. "Exclusive Dealing and Entry, when Buyers Compete," CEPR Discussion Papers 3493, C.E.P.R. Discussion Papers.
  4. Jay Pil Choi, 2007. "Tying in Two-Sided Markets with Multi-Homing," CESifo Working Paper Series 2073, CESifo Group Munich.
  5. B. Douglas Bernheim & Michael D. Whinston, . "Exclusive Dealing," Working Papers 96008, Stanford University, Department of Economics.
  6. Mark Armstrong & Julian Wright, 2007. "Two-sided Markets, Competitive Bottlenecks and Exclusive Contracts," Economic Theory, Springer, vol. 32(2), pages 353-380, August.
  7. BELLEFLAMME, Paul & TOULEMONDE, Eric, 2007. "Negative intra-group externalities in two-sided markets," CORE Discussion Papers 2007039, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. repec:rje:randje:v:37:y:2006:3:p:645-667 is not listed on IDEAS
  9. Segal, Ilya, 2003. "Coordination and discrimination in contracting with externalities: divide and conquer?," Journal of Economic Theory, Elsevier, vol. 113(2), pages 147-181, December.
  10. John Simpson & Abraham L. Wickelgren, 2007. "Naked Exclusion, Efficient Breach, and Downstream Competition," American Economic Review, American Economic Association, vol. 97(4), pages 1305-1320, September.
  11. Toker Doganoglu & Julian Wright, 2003. "Multihoming and compatibility," Departmental Working Papers wp0314, National University of Singapore, Department of Economics.
  12. Caillaud, Bernard & Jullien, Bruno, 2001. "Competing cybermediaries," European Economic Review, Elsevier, vol. 45(4-6), pages 797-808, May.
  13. Armstrong, Mark, 1999. "Competition in the Pay-TV Market," Journal of the Japanese and International Economies, Elsevier, vol. 13(4), pages 257-280, December.
  14. Bernheim, B. Douglas & Peleg, Bezalel & Whinston, Michael D., 1987. "Coalition-Proof Nash Equilibria I. Concepts," Journal of Economic Theory, Elsevier, vol. 42(1), pages 1-12, June.
  15. Jullien, Bruno, 2000. "Competing in Network Industries: Divide and Conquer," IDEI Working Papers 112, Institut d'Économie Industrielle (IDEI), Toulouse, revised Jul 2001.
  16. Abito, Jose Miguel & Wright, Julian, 2008. "Exclusive dealing with imperfect downstream competition," International Journal of Industrial Organization, Elsevier, vol. 26(1), pages 227-246, January.
  17. Michael D. Whinston & Ilya R. Segal, 2000. "Naked Exclusion: Comment," American Economic Review, American Economic Association, vol. 90(1), pages 296-309, March.
  18. Katz, Michael L & Shapiro, Carl, 1986. "Technology Adoption in the Presence of Network Externalities," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 822-41, August.
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