Naked Exclusion Under Exclusive-Offer Competition

Abstract

This study constructs a model of anticompetitive exclusive-offer competition between two existing upstream firms. Under exclusive-offer competition, the upstream firm's profit depends on the rival's exclusive offer. If the rival makes an exclusive offer acceptable for the downstream firm, the upstream firm is excluded unless it succeeds in exclusion. Consequently, the upper bound of exclusive offers becomes higher than when one of the upstream firms is a potential entrant that cannot make any exclusive offer. Thus, the exclusion of the existing upstream firm can be an equilibrium outcome even in the case where the potential entrant is never excluded.

Exclusive dealing when upstream displacement is possible

“…This paper contributes to the literature on exclusive contracts and complements studies which derive exclusion results under a single‐buyer framework (e.g., Aghion & Bolton, 1987; Farrell, 2005; Fumagalli et al, 2009, 2012; Gavin & Ross, 2018; Kitamura et al, 2013, 2018a, 2018b; Yong, 1996). Broadly in line with these papers, exclusion is made possible in our setting because the buyer does not benefit sufficiently from competition between the incumbent and the entrant 7 .…”

“…Much of the previous literature has concluded that exclusion is more likely to occur when the entrant's cost advantage is less drastic (e.g., Abito & Wright, 2008; Chen & Shaffer, 2014; Kitamura, 2010; Kitamura et al, 2018a, 2018b). 8 In contrast with these studies, our paper demonstrates that when products are differentiated, exclusion is more likely to occur when the efficiency gap between the entrant and the incumbent falls into an intermediate range 9 .…”

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.…”

“…If we consider the case in which every manufacturer can make exclusive offers, exclusive-offer competition leads to exclusion outcomes as inKitamura et al [2018b]. Our model setting eliminates the possibility that such an effect makes exclusion attainable, which allows us to clarify the role of an alternative distribution channel.16 Several seminal studies such asRasmusen et al [1991] andSegal and Whinston [2000] indicate that price commitment is unlikely if a precise prescription of the nature of the final goods is not available in advance.17 In the Supplementary Appendix, we explore the case in which condition (2) does not hold.…”

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

“…In this study, we assume that U E cannot make an exclusive offer Kitamura, Matsushima, and Sato (2018b). consider the case in which manufacturers can make exclusive offers and show that exclusion-offer competition leads to exclusion outcomes.…”