Naked Exclusion by a Dominant Supplier: Exclusive Contracting and Loyalty Discounts

37 Pages Posted: 9 Dec 2009 Last revised: 16 Dec 2009

See all articles by Patrick DeGraba

Patrick DeGraba

Federal Trade Commission - Antitrust I

Date Written: December 2, 2009

Abstract

This paper shows that demand asymmetries between a dominant input supplier and a smaller rival allow the dominant supplier to use exclusive contracts to sell its input at the monopoly price, even though the small rival remains in the market, offers its input at marginal cost, and is more efficient at serving a small segment of the market. The dominant supplier pays each downstream producer an amount equal to the maximum quasi rents a producer could earn if he were the only purchaser of the smaller rival’s input, and the small rival earned zero profit on the sale. This payment makes it more profitable for a producer to use the dominant supplier’s input than to switch to the small rival’s input. The extracted monopoly rents plus addition revenue from sales in market segments in which the rival would have competed but not won sales, “finance” the payments to producers to not use the small rival’s input. This model also shows these market share discounts can reduce welfare.

*The views expressed in this paper are those of the author, and do not necessarily reflect the views of the Federal Trade Commission.

Keywords: Exclusive Dealing, Loyalty Discounts, Naked Exclusion

JEL Classification: L12, L42

Suggested Citation

DeGraba, Patrick, Naked Exclusion by a Dominant Supplier: Exclusive Contracting and Loyalty Discounts (December 2, 2009). Available at SSRN: https://ssrn.com/abstract=1521017 or http://dx.doi.org/10.2139/ssrn.1521017

Patrick DeGraba (Contact Author)

Federal Trade Commission - Antitrust I ( email )

600 Pennsylvania Avenue, NW
Rm. 4249
Washington, DC 20580
United States
202-326-2855 (Phone)
202-326-3443 (Fax)

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