Friday, July 26, 2013

Exclusive Contracts and Market Dominance

Posted by D. Daniel Sokol

Giacomo Calzolari, University of Bologna and Vincenzo Denicolo, University of Bologna analyze Exclusive Contracts and Market Dominance.

ABSTRACT: We develop a theory of exclusive dealing that rehabilitates pre-Chicago-school analyses. Our theory rests on two realistic assumptions: that firms are imperfectly informed about demand, and that a dominant firm has a competitive advantage over its rivals. Under those assumptions, exclusive contracts tend to be pro-competitive when the dominant firm's competitive advantage is small, but are anti-competitive when it is more pronounced. In this latter case, the dominant firm uses exclusivity clauses as a means to increase its market share and profit, without necessarily driving its rivals out of the market, or impeding their entry. We discuss the implications of these results for competition policy.

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