Defending Home against Giants: Exclusive Dealing as a Survival Strategy for Local Firms*

Abstract

We consider exclusive contracts a survival strategy for a local incumbent manufacturer facing a multinational manufacturer's entry. Although both manufacturers prefer to trade with an efficient local distributor, trading with inefficient competitive distributors is acceptable only to the entrant, because of the entrant's efficiency. Hence, such competitive distributors can be an outside option for the entrant. As the entrant becomes efficient, the outside option works effectively, implying that the entry does not considerably benefit the efficient local distributor. Thus, the local manufacturer is more likely to sign an anticompetitive exclusive contract with the efficient distributor as the entrant becomes efficient.

Equilibrium exclusive dealing in oligopoly

“…If the common agent requires overall break-even then common agency results in manufacturers setting wholesale prices equal to marginal cost which then implies that the common agent will choose collusive retail prices. As a result, manufacturers choose common agency if they can extract the full profit from their agents (Bernheim and Whinston 1985) or if they can only extract the 1 Exclusive dealing can also be used to deter entry (see Kitamura, Matsushima and Sato (2023) for a recent contribution and literature review) and to deal with various incentive conflicts between manufacturers and retailer such as free-riding by manufacturers on the services (advertising, training, client lists) provided by a rival manufacturers (see Sass (2005) for a brief survey). 2 See also Rey and Stiglitz (1995) for a detailed exposition of the wholesale price softening argument for exclusive territories.…”