Exclusive Dealing: Investment Promotion May Facilitate Inefficient Foreclosure

Posted by D. Daniel Sokol

Chiara Fumagalli, Bocconi University - Department of Economics; Centre for Economic Policy Research (CEPR), Massimo Motta, Universitat Pompeu Fabra and Thomas Ronde, University of Copenhagen - Department of Economics; Center for Economic and Business Research (CEBR); Centre for Economic Policy Research (CEPR) have an interesting paper on Exclusive Dealing: Investment Promotion May Facilitate Inefficient Foreclosure.

ABSTRACT: This paper studies a model whereby exclusive dealing (ED) can both promote investment and foreclose a more efficient supplier. Since ED promotes the incumbent seller's investment, the seller and the buyer realize a greater surplus from bilateral trade under exclusivity. Hence, the parties involved may sign an ED contract that excludes a more efficient entrant in circumstances where ED would not arise absent investment. The paper therefore invites a more cautious attitude towards accepting possible investment promotion arguments as a defense for ED.