DP9545 Exclusive contracts and market dominance

Author(s): Giacomo Calzolari, Vincenzo Denicolò
Publication Date: July 2013
Keyword(s): Dominant firm, Exclusive dealing, Non-linear pricing
JEL(s): D42, D82, L42
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9545

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.