Exclusion via Non-Exclusive Contracts

Exclusion via Non-Exclusive Contracts

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Article ID: iaor201521978
Volume: 47
Issue: 1
Start Page Number: 325
End Page Number: 347
Publication Date: Feb 2014
Journal: Canadian Journal of Economics/Revue canadienne d'conomique
Authors: ,
Keywords: management
Abstract:

We establish that non‐linear vertical contracts can allow an incumbent to exclude an upstream rival in a setting that does not rely on the exclusivity of the incumbent's contracts with downstream firms or any limits on distribution channels available to the incumbent or rival. The optimal contract we describe is a three‐part quantity discounting contract that involves the payment of an allowance to a downstream distributor and a marginal wholesale price below the incumbent's marginal cost for sufficiently large quantities. The optimal contract is robust to allowing parties to renegotiate contracts in case of entry.

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