On the Competition Enhancing Effects of Exclusive Dealing Contracts
E.CA Economics; Ludwig Maximilian University of Munich - Munich Graduate School of Economics (MGSE)
WHU - Otto Beisheim School of Management; CESifo (Center for Economic Studies and Ifo Institute)
August 12, 2011
Antitrust scholars have argued that exclusive contracts have anticompetitive, or at best neutral effects, if no efficiencies are generated. In contrast, this paper shows that exclusive contracts can have procompetitive effects, provided buyers are imperfect downstream competitors and contract breach is feasible. In that case, an efficient entrant is not necessarily foreclosed through exclusive contracts but induces buyers to breach. Because breaching buyers have to pay expectation damages to the incumbent, the downstream profits they obtain when breaching must be large enough. Therefore, the entrant needs to set a lower wholesale price than absent exclusive contracts, leading to lower final consumer prices and higher welfare.
Number of Pages in PDF File: 33
Keywords: exclusive contracts, contract breach, antitrust policy
JEL Classification: D43, K21, L12, L42
Date posted: August 12, 2011 ; Last revised: February 28, 2013
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