Exclusive Dealing when Upstream Displacement is Possible

Abstract

We study exclusive dealing when the incumbent may be displaced by a more efficient entrant due to the need for a firm to pay a fixed cost to remain active. We show that the incumbent can deter socially efficient entry through exclusive contracts under the one-buyer-one-supplier framework. This result continues to hold in the presence of product differentiation, in which case exclusion is more likely to occur when the efficiency gap between the entrant and the incumbent falls into an intermediate range.