Exclusionary Contracts

Abstract

When have market participants the incentive to strike contracts that exclude potential entrants? This paper synthesizes the theory of exclusionary contracts and applies the theory to a recent antitrust case, Nielsen. We consider an incumbent facing potential entry and contracting with both upstream suppliers and downstream buyers. Focusing first on contracts with downstream buyers, we set out a "Chicago benchmark" set of assumptions that yields no incentive for exclusionary contracts. Departing from the benchmark in each of three directions yields a theory of exclusion. These include the two existing theories (Aghion-Bolton (1987) and Rasmusen-Ramseyer-Wiley (1991)) as well as a third, vertical theory: long term contracts at one stage of a supply chain can extract rents from a firm with market power at another stage. Turning to upstream contracts, we oer a theory of simultaneous contract offers that generalizes the "Colonel Blotto" game. Nielsen illustrates the full range of the predictions of the theory

This version of the paper, on SSRN, contains two sections that are not in the article (forthcoming in JLEO): (1) an extension to the theory to allow simultaneous contracting with an upstream supplier and a downstream buyer. The vertical contracts are complementary, in that each contract relaxes the individual-rationality constraint in the other. Dual contracting always dominates exclusive contracts or long term contracts with either the supplier or buyer alone; (2) a brief summary of the case, along with a set of questions, intended for teaching the case in graduate Industrial Organization courses.

Keywords: exclusion, competition policy, contract theory

JEL Classification: L14, K21, L23