Exclusive Dealing Contract and Inefficient Entry Threat
This paper examines the effects of exclusive dealing contracts in a simple model with manufacturers-distributors relations. We consider entrants in both manufacturing and distribution sectors. It is well-known that a potential entry threat is welfare increasing under homogenous price competition, even though the potential entrant is less productive. This paper reexamines this intuition by employing the above model. We show that the entry threat of a less-productive manufacturer is welfare decreasing when there is an exclusive dealing contract between the incumbent manufacturer and distributor. This result is in contrast to the view of the contestable markets literature.
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- Fumagalli, Chiara & Motta, Massimo, 2002.
"Exclusive Dealing and Entry, when Buyers Compete,"
CEPR Discussion Papers
3493, C.E.P.R. Discussion Papers.
- Baumol, William J, 1982. "Contestable Markets: An Uprising in the Theory of Industry Structure," American Economic Review, American Economic Association, vol. 72(1), pages 1-15, March.
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- Roman Inderst & Greg Shaffer, 2007.
"Retail Mergers, Buyer Power and Product Variety,"
Royal Economic Society, vol. 117(516), pages 45-67, 01.
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