Exclusive dealing when upstream displacement is possible

Abstract

We study exclusive dealing when the incumbent may be displaced by a more efficient entrant due to the need for a firm to pay a fixed cost to remain active. We show that the incumbent can deter socially efficient entry through exclusive contracts under the one-buyer-one-supplier framework. This result continues to hold in the presence of product differentiation, in which case exclusion is more likely to occur when the efficiency gap between the entrant and the incumbent falls into an intermediate range.

Exclusive dealing in the presence of a vertically integrated firm

“…Since exclusive dealing can be observed in many industries (Lafferty et al, 1984;Heide et al, 1998;Cooper et al, 2005), several researchers employ different frameworks from the model in the Chicago School's classic argument and are able to unearth some conditions under which exclusive dealing occurs (Rasmusen et al, 1991;Yong, 1996;Bernheim and Whinston, 1998;Segal and Whinston, 2000;Farell, 2005;Fumagalli and Motta, 2006;Simpson and Wickelgren, 2007;Abito and Wright, 2008;Fumagalli et al, 2009;DeGraba, 2013;Kitamura et al, 2014Kitamura et al, , 2017Kitamura et al, , 2018Liu and Meng, 2021).…”

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

“…His model allows the possibility that entry increases industry profit, in contrast to the previous models with downstream competition.11Fumagalli et al [2012] extend the three-player model in a different direction by introducing the incumbent's relationship-specific investments.12 Based on the Chicago School three-player model,Kitamura et al [2018a] introduce a complementary input supplier and show that exclusion is attainable when the complementary input supplier has market power. In addition,Kitamura et al [2018b] consider the case in which symmetric manufacturers can make exclusive offers based on the three-player model and show that exclusive-offer competition leads to exclusion outcomes.13 Liu and Meng [2021] introduce the fixed cost of the incumbent to stay in the market. If the entrant enters, the fixed cost forces the incumbent to exit the market, lowering the buyer's benefit from the new entry.© 2023 The Authors.…”