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

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Kluwer Academic Publishers
Copyright © 2000 by Kluwer Academic Publishers
Economics; Industrial Organization; Microeconomics
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