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Exclusive Dealing, Preferential Dealing, and Dynamic Efficiency

Exclusive Dealing, Preferential Dealing, and Dynamic Efficiency Several recent antitrust cases brought by the U.S.Department of Justice have challenged exclusivedealing by firms with market power. This paperreviews the legal treatment of exclusive dealing andanalyzes the economic implications of contracts thatpenalize customers for trading with a rival supplier. These contracts include arrangements that make it morecostly for customers to trade with a rival(preferential dealing) as well as contracts thatprohibit such trades (exclusive dealing). Theanalysis assumes that buyers and sellers negotiateefficiently, so the focus is on the implications ofcontract terms for investment behavior (dynamicefficiency). When investment is limited to theentrant, the optimal contract between a monopolyseller and a buyer imposes a socially excessivepenalty for trade with a rival. The paper contraststhe dynamic efficiency consequences of contractualpenalties and volume discounts. Both penalties andvolume discounts reduce a customer's gains from tradewith rival firms. However, in many circumstances,penalties harm dynamic efficiency because they lowera rival firm's marginal incentives to invest. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Industrial Organization Springer Journals

Exclusive Dealing, Preferential Dealing, and Dynamic Efficiency

Review of Industrial Organization , Volume 16 (2) – Oct 16, 2004

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References (14)

Publisher
Springer Journals
Copyright
Copyright © 2000 by Kluwer Academic Publishers
Subject
Economics; Industrial Organization; Microeconomics
ISSN
0889-938X
eISSN
1573-7160
DOI
10.1023/A:1007876801020
Publisher site
See Article on Publisher Site

Abstract

Several recent antitrust cases brought by the U.S.Department of Justice have challenged exclusivedealing by firms with market power. This paperreviews the legal treatment of exclusive dealing andanalyzes the economic implications of contracts thatpenalize customers for trading with a rival supplier. These contracts include arrangements that make it morecostly for customers to trade with a rival(preferential dealing) as well as contracts thatprohibit such trades (exclusive dealing). Theanalysis assumes that buyers and sellers negotiateefficiently, so the focus is on the implications ofcontract terms for investment behavior (dynamicefficiency). When investment is limited to theentrant, the optimal contract between a monopolyseller and a buyer imposes a socially excessivepenalty for trade with a rival. The paper contraststhe dynamic efficiency consequences of contractualpenalties and volume discounts. Both penalties andvolume discounts reduce a customer's gains from tradewith rival firms. However, in many circumstances,penalties harm dynamic efficiency because they lowera rival firm's marginal incentives to invest.

Journal

Review of Industrial OrganizationSpringer Journals

Published: Oct 16, 2004

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