Thursday, July 7, 2011
Posted by D. Daniel Sokol
Chiara Fumagalli, Massimo Motta and Thomas Rondehave an interesting article on Exclusive dealing: investment promotion may facilitate inefficient foreclosure. Recommended.
ABSTRACT: This paper studies a model where exclusive dealing (ED) can both promote investment and foreclose a more efficient supplier. While investment promotion is usually regarded as a pro-competitive effect of ED, our paper shows that it may be the very reason why a contract that forecloses a more effcient supplier is signed. Absent the effect on investment, the contract would not be signed and foreclosure would not be a concern. For this reason, considering potential foreclosure and investment promotion in isolation and then summing them up may not be a suitable approach to assess the net effect of ED. The paper therefore invites a more cautious attitude towards accepting possible investment promotion arguments as a defense for ED.