CentER Discussion Paper No. 2008-20
27 Pages Posted: 20 Feb 2008 Last revised: 23 Feb 2009
Date Written: February 2008
In the case of vertically differentiated products, Bertrand competition at the retail level does not prevent an incumbent upstream firm from using exclusivity contracts to deter the entry of a more efficient rival, contrary to what happens in the homogenous product case. Indeed, because of differentiation, the incumbent's inferior product is not eliminated upon entry. As a result, a retailer who considers rejecting the exclusivity clause expects to earn much less than the incumbent's monopoly rents. Thus, in equilibrium, the incumbent can offer high enough an upfront payment to induce all retailers to sign on the contract and achieve exclusion.
Keywords: vertical differentiation, exclusive dealing, contracts, naked exclusion, monopolization
JEL Classification: L12, L42
Suggested Citation: Suggested Citation