Strategic buyers and exclusionary contracts

Abstract

This paper characterizes equilibrium exclusionary contracts between buyers, an incumbent firm, and a potential entrant when buyers can either vertically integrate or contract with the outside entrant. In this setting, exclusionary contracts are generally shown to be efficient and to deter inefficient entry that would otherwise occur. With multiple unorganized buyers, equilibrium contracts are shown to take a 'divide-and-conquer' form and, in some cases, to deter some efficient entry. In such cases, efficient contracting can be restored by a policy that prohibits price discrimination and gives agents free reign to sign exclusionary agreements. Copyright 1994 by American Economic Association.