Exclusionary Contracts

Ran Jing and Ralph Winter ()

The Journal of Law, Economics, and Organization, 2014, vol. 30, issue 4, 833-867

Abstract: When have market participants the incentive to strike contracts that exclude potential entrants? This article synthesizes the theory of exclusionary contracts and applies the theory to a recent antitrust case, Nielsen. We consider an incumbent facing potential entry and contracting with both upstream suppliers and downstream buyers. Focusing first on contracts with downstream buyers, we set out a "Chicago benchmark" set of assumptions that yields no incentive for exclusionary contracts. Departing from the benchmark in each of three directions yields a theory of exclusion. These include the two existing theories, developed by Aghion and Boulton and by Rasmusen, Ramseyer and Wiley. The structure also captures a third, vertical theory: long-term contracts at one stage of a supply chain can extract rents from a firm with market power at another stage. Turning to upstream contracts, we offer a theory of simultaneous contract offers that generalizes the "Colonel Blotto" game. Nielsen illustrates the full range of the predictions of the theories of exclusionary contracts. (JEL L14, K21, L23)

Date: 2014
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