Diagnosing Foreclosure due to Exclusive Dealing

Abstract:     
Exclusive dealing arrangements, in which a distributor contracts to work exclusively with a single manufacturer, can be efficiency enhancing or they can be an anticompetitive means to foreclose markets. This paper evaluates the effect of exclusive distribution arrangements on competition in the Chicago beer market in 1994. A diagnostic test is provided to judge whether exclusive arrangements between brewers and their distributors lead to foreclosure. To implement this test I estimate a model of consumer demand and firm behavior that incorporates industry details and allows for distribution through exclusive and shared channels. The test indicates that foreclosure effects are not present in this market, suggesting that the most likely effect of intervention would be to reduce social welfare.

Keywords: Exclusive dealing, foreclosure, vertical restraints

JEL Classifications: L12, L22, L42, K21

Working Paper Series