Cheap Exclusion in Markets with Multiple Complements

Abstract

We extend the theory of exclusive dealing in first-mover environments to settings where the incumbent seller’s product is used with multiple complements in a distribution chain and the incumbent can sign exclusive dealing contracts with more than one of them. The model is motivated by the market for biosimilar pharmaceuticals, where incumbent sellers that face a threat of entry can sign exclusionary contracts with both providers and insurance carriers prior to entry. We show that when the incumbent’s complementors are vertically related, it can be profitable for the incumbent to sign exclusive contracts with indirect buyers, who operate downstream from the direct buyers of the product. Under linear pricing, such exclusion is profitable if the pass-through rate is sufficiently low, and under nonlinear pricing and symmetric Nash bargaining, it is profitable for all pass-through rates. Complementors face a more severe coordination problem than independent buyers that can make anticompetitive exclusion more likely and especially cheap.

Keywords: Exclusive Dealing; Cheap Exclusion; Bargaining; Pharmaceuticals; Healthcare; Health Insurance

JEL Classification: L12, L41, L42