Exclusive Dealing Contract and Inefficient Entry Threat

Noriyuki Yanagawa and Ryoko Oki
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Noriyuki Yanagawa: Faculty of Economics, University of Tokyo
Ryoko Oki: Graduate School of Economics, University of Tokyo

No CARF-F-132, CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo

Abstract: This paper examines the effects of exclusive dealing contracts in a simple model with manufacturers-distributors relations. We consider entrants in both manufacturing and distribution sectors. It is well-known that a potential entry threat is welfare increasing under homogenous price competition, even though the potential entrant is less productive. This paper reexamines this intuition by employing the above model. We show that the entry threat of a less-productive manufacturer is welfare decreasing when there is an exclusive dealing contract between the incumbent manufacturer and distributor. This result is in contrast to the view of the contestable markets literature.

Pages: 21 pages
Date: 2008-09
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Persistent link: https://EconPapers.repec.org/RePEc:cfi:fseres:cf132

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