The Use of Exclusive Contracts to Deter Entry

27 Pages Posted: 16 Oct 2001

See all articles by John Simpson

John Simpson

U.S. Federal Trade Commission - Bureau of Economics

Abraham L. Wickelgren

University of Texas at Austin - School of Law; University of Texas at Austin - Center for Law, Business, and Economics

Date Written: July 18, 2001

Abstract

This paper shows that an upstream monopolist that sells to competing downstream firms can profitably use exclusive contracts to deter entry even where scale economies are absent. The incumbent monopolist can often place each downstream firm in a prisoner's dilemma by offering downstream firms a discount if they sign an exclusive contract covering later periods. Because a downstream firm that refuses to sign the exclusive contract loses profit in the initial period to downstream firms that sign the exclusive contract, downstream firms will sign exclusive contracts even when, over the longer-term, they would obtain the upstream good at a lower price if they all refused to sign.

Keywords: Exclusive Contracts, Entry Deterrence, Antitrust

JEL Classification: L12, L41

Suggested Citation

Simpson, John and Wickelgren, Abraham L., The Use of Exclusive Contracts to Deter Entry (July 18, 2001). Available at SSRN: https://ssrn.com/abstract=287059 or http://dx.doi.org/10.2139/ssrn.287059

John Simpson

U.S. Federal Trade Commission - Bureau of Economics

601 Pennsylvania Avenue, NW
Washington, DC 20580
United States

Abraham L. Wickelgren (Contact Author)

University of Texas at Austin - School of Law ( email )

727 East Dean Keeton Street
Austin, TX 78705
United States

University of Texas at Austin - Center for Law, Business, and Economics

Austin, TX 78712
United States

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