The demand-boost theory of exclusive dealing
Previous versions of this article circulated under the title “Exclusive Dealing with Costly Rent Extraction,” and “Exclusive Dealing with Distortionary Pricing.” The authors are grateful to the Editor, David Myatt, and two anonymous referees for detailed comments that greatly improved the exposition. The authors also thank Emilio Calvano, Philippe Chone, David Gilo, Volker Nocke, Salvatore Piccolo, Giancarlo Spagnolo, Yossi Spiegel, Chris Wallace, Yaron Yehezkel, and seminar participants at Bern, Mannheim, Paris Dauphine, Shanghai School of Economics and Finance, Jiao Tong University, Luiss, Bologna, EUI, Catholic University (Milan), EIEF, the BECCLE Competition Policy Conference, the CRESSE conference, OFCOM, and the European Commission for useful comments and suggestions.
Abstract
This article unifies various approaches to the analysis of exclusive dealing that so far have been regarded as distinct. The common element of these approaches is that firms depart from efficient pricing, raising marginal prices above marginal costs. We show that with distorted prices, exclusive dealing can be directly profitable and anticompetitive provided that the dominant firm enjoys a competitive advantage over rivals. The dominant firm gains directly, rather than in the future, or in adjacent markets, thanks to the boost in demand it enjoys when buyers sign exclusive contracts. We discuss the implication of the theory for antitrust policy.
