Naked Exclusion, Efficient Breach, and Downstream Competition

Abstract

Previous papers by Eric B. Rasmusen, J. Mark Ramseyer, and John S. Wiley, Jr. (1991) and Ilya R. Segal and Michael D. Whinston (2000) argue that exclusive contracts can inefficiently deter entry in the presence of scale economies and multiple buyers. We first show that these results no longer hold when buyers are final consumers who can breach these contracts and pay expectation damages. We then show, however, that exclusive contracts can inefficiently deter entry if buyers are downstream competitors, even in the absence of scale economies and even if breach is possible. (JEL D86, K21, L11 , L13, L14, L40)

Exclusive contracts with complementary inputs

“…For example, we assume that the downstream firm is a monopolist. We predict that, as Simpson and Wickelgren (2007) and Abito and Wright (2008) discuss, adding downstream competition to our model would increase the likelihood of reaching an exclusion equilibrium.…”

“…3 In rebuttals of this argument, postChicago economists indicate specific circumstances under which anticompetitive exclusive dealing occurs. 4 These studies, by extending the single-buyer model upon which the Chicago School argument depends to a multiple-buyer model, introduce scale economies wherein the entrant requires a certain number of buyers to cover its fixed costs (Rasmusen, Ramseyer, and Wiley, 1991;Segal and Whinston, 2000a) and competition between buyers (Simpson and Wickelgren, 2007;Abito and Wright, 2008). …”

“…This study is related to the literature on anticompetitive exclusive contracts (Rasmusen, Ramseyer, and Wiley, 1991;Segal and Whinston, 2000a;Simpson and Wickelgren, 2007;Abito and Wright, 2008). 6 These studies share a common feature: reaching the exclusion result requires multiple downstream buyers.…”

Exclusive contracts and bargaining power

“…2 By incorporating additional players into the baseline setting in the Chicago School, many papers examine possibilities of signing anticompetitive exclusive contracts (e.g., scale economies (Rasmusen, Ramseyer, and Wiley, 1991;Segal and Whinston, 2000) and competition between the buyers (Simpson and Wickelgren, 2007;Abito and Wright, 2008)). 3 By contrast, we show a possibility that an anticompetitive exclusive contract attains under a one-buyer-one-supplier framework with one potential supplier.…”

Vertical Contracts and Mandatory Universal Distribution

“…That literature asks whether an incumbent monopoly can profitably use an exclusive contract to inefficiently deter entry. The models in Fumagalli and Motta (2006), Simpson and Wickelgren (2007), Wright (2008), Abito and Wright (2008), Argenton (2010), Doganoglu and Wright (2010), and Kitamura (2010Kitamura ( , 2011 have an incumbent monopoly and one or more potential entrants that produce identical or differentiated products and imperfect downstream competition, possibly with differentiation. Both they and we consider two-part tariffs, as a means of avoiding double marginalization problems.…”