Ordover and Shaffer on Exclusionary Discounts

Posted by D. Daniel Sokol

Exclusion is one of the core issues of antitrust.   A new working paper by  Janusz Ordover of NYU and Greg Shaffer of the University of Rochester titled Exclusionary Discounts sheds some light on some of the complexities in this area.

ABSTRACT: We consider a two-period model with two sellers and one buyer in which the efficient outcome calls for the buyer to purchase one unit from each seller in each period. We show that when the buyer's valuations between periods are linked by switching costs and at least one seller is financially constrained, there are plausible conditions under which exclusion arises as the unique equilibrium outcome (the buyer buys both units from the same seller). The exclusionary equilibria are supported by price-quantity offers in which the excluding seller offers its second unit at a price that is below its marginal cost of production. In some cases, the price of this second unit is negative. Our findings contribute to the literatures on exclusive dealing, bundling, and loyalty rebates/payments.