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Competition with exclusive contracts in vertically related markets: An equilibrium non-existence result

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  • Schutz, Nicolas

Abstract

I study a model in which two upstream firms compete to supply a homogeneous input to two downstream firms selling differentiated products. Upstream firms offer exclusive, discriminatory, public, two-part tariff contracts to the downstream firms. I show that, under very general conditions, this game does not have a pure-strategy subgame-perfect equilibrium. The intuition is that variable parts in such an equilibrium would have to be pairwise-stable; however, with pairwise-stable variable parts, downstream competitive externalities are not internalized, implying that upstream firms can profitably deviate. I contrast this non-existence result with earlier papers that found equilibria in related models.

Suggested Citation

  • Schutz, Nicolas, 2024. "Competition with exclusive contracts in vertically related markets: An equilibrium non-existence result," International Journal of Industrial Organization, Elsevier, vol. 96(C).
    • Handle: RePEc:eee:indorg:v:96:y:2024:i:c:s0167718724000523
    DOI: 10.1016/j.ijindorg.2024.103097
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    1. David Spector, 2011. "Exclusive contracts and demand foreclosure," RAND Journal of Economics, RAND Corporation, vol. 42(4), pages 619-638, December.
    2. Motta, Massimo & Persson, Lars & Fumagalli, Chiara, 2005. "Exclusive Dealing, Entry and Mergers," CEPR Discussion Papers 4902, C.E.P.R. Discussion Papers.
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    8. Daniel P. O'Brien & Greg Shaffer, 1997. "Nonlinear Supply Contracts, Exclusive Dealing, and Equilibrium Market Foreclosure," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(4), pages 755-785, December.
    9. 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.
    10. Greg Shaffer, 1991. "Slotting Allowances and Resale Price Maintenance: A Comparison of Facilitating Practices," RAND Journal of Economics, The RAND Corporation, vol. 22(1), pages 120-135, Spring.
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    Cited by:

    1. Johan Hombert & Jérôme Pouyet & Nicolas Schutz, 2019. "Anticompetitive Vertical Merger Waves," Journal of Industrial Economics, Wiley Blackwell, vol. 67(3-4), pages 484-514, September.
    2. Marie-Laure Allain & Claire Chambolle & Patrick Rey, 2016. "Vertical Integration as a Source of Hold-up," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 83(1), pages 1-25.
    3. Matthias Hunold & Johannes Muthers, 2023. "Manufacturer Collusion and Resale Price Maintenance," Volkswirtschaftliche Diskussionsbeiträge 197-23, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht.
    4. Pouyet, Jérôme & Thomas, Trégouët, 2021. "The Competitive Effects of Vertical Integration in Platform Markets," CEPR Discussion Papers 16545, C.E.P.R. Discussion Papers.
    5. Pouyet, Jérôme & Trégouët, Thomas, 2016. "Vertical Mergers in Platform Markets," CEPR Discussion Papers 11703, C.E.P.R. Discussion Papers.
    6. Caprice, Stéphane & von Schlippenbach, Vanessa & Wey, Christian, 2014. "Supplier Fixed costs and Retail Market Monopolization," TSE Working Papers 14-524, Toulouse School of Economics (TSE).
    7. Lømo, Teis Lunde & Meland, Frode & Sandvik, Håvard Mork, 2020. "Do slotting allowances reduce product variety?," Working Papers in Economics 7/20, University of Bergen, Department of Economics.

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    More about this item

    Keywords

    Vertical relations; Exclusive dealing; Two-part tariffs; Slotting fees;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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