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.