DP10176 Exclusive Dealing and Vertical Integration in Interlocking Relationships
|Author(s):||Volker Nocke, Patrick Rey|
|Publication Date:||September 2014|
|Keyword(s):||bilateral contracting, exclusive dealing, foreclosure, vertical merger, vertical relations|
|JEL(s):||D43, L13, L42|
|Programme Areas:||Industrial Organization|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=10176|
We develop a model of interlocking bilateral relationships between upstream firms (manufacturers) that produce differentiated goods and downstream firms (retailers) that compete imperfectly for consumers. Contract offers and acceptance decisions are private information to the contracting parties. We show that both exclusive dealing and vertical integration between a manufacturer and a retailer lead to vertical foreclosure, to the detriment of consumers and society. Finally, we show that firms have indeed an incentive to sign such contracts or to integrate vertically.