When Does Exclusive Dealing Intensify Competition for Distribution? Comment on Klein and Murphy

Abstract

In a recent article in this Journal, Benjamin Klein and Kevin M. Murphy argue that exclusive dealing contracts are pro-competitive because exclusivity intensifies manufacturer competition for distribution and thereby decreases wholesale prices. This is an important pro-competitive effect of exclusive dealing, which explains why the practice can benefit consumers. However, it is important to understand when this effect is important, and when it is not. For that purpose, this note extends the Klein and Murphy model to allow for asymmetric firms, so one firm can be dominant in the market. It is shown that the existence and strength of pro-competitive benefits depends on the degree of competition among manufacturers. The larger the market power of the producer that engages in exclusive dealing, the smaller the effect outlined by Klein and Murphy. Hence, the efficiency-enhancing gains from exclusive dealing are least significant precisely when the danger of anti-competitive foreclosure is largest.

Keywords: exclusive dealing