Exclusivity in Network Industries

Abstract

Exclusivity provisions, exclusive dealing provisions, and exclusive membership rules can create formidable entry barriers when employed by dominant incumbent networks. Exclusivity rules can restrict consumer choice and stifle innovation by denying would-be entrants the ability to gain critical mass, and by undermining consumer confidence in an emerging network. Exclusive membership rules can be especially pernicious in network industries by creating artificial entry barriers that operate on top of naturally occurring entry barriers based on consumer adoption costs, switching costs, and especially consumer coordination costs. These costs are elevated if the new network is incompatible with the established network, as may be required to avoid infringing on the intellectual property rights of the established network. Exclusivity rules are contrasted with a refusal by the incumbent network to permit the new network to interconnect and/or offer backward compatibility.

Note: This paper was presented at the George Mason Law School Antitrust Symposium.

JEL Classification: L12, L96, K23