Naked Exclusion: Comment

Abstract

Representatives of the "Chicago School" of economic thought argue that an incumbent monopolist cannot profitably deter entry by signing exclusionary contracts with buyers, since the buyers would have to be compensated for forsaking future competition, and the necessary compensation exceeds the incumbent's possible gain from exclusion. Rasmusen, Ramseyer, and Wiley [American Economic Review 1991, henceforth RRW] have argued that an incumbent may in fact be able to exclude rivals profitably by exploiting buyers' lack of coordination. While their argument is potentially important, their two main results contain errors. This note reconsiders the RRW model, providing correct characterizations of the likelihood and cost of exclusion for an incumbent firm. While the intuition suggested by RRW is confirmed, the possibility of profitable exclusion is shown to depend on the incumbent's ability to discriminate in its offers to different buyers. Absent the ability to discriminate, the incumbent can exclude profitably only when buyers fail to coordinate on their most preferred continuation equilibrium. In contrast, when discrimination is possible, the incumbent need not rely on a lack of buyer coordination to exclude profitably: discrimination allows the incumbent to successfully exploit the externalities that exist across buyers. The note also reconsiders RRW's model of sequential contracting between the incumbent and buyers. In contrast to RRW's incorrect analysis, it finds that as the number of buyers becomes large, the externalities across buyers become so severe that the incumbent is always able to exclude for free.