Exclusive Dealing: Investment Promotion May Facilitate Inefficient Foreclosure

Abstract

This paper studies a model whereby exclusive dealing (ED) can both promote investment and foreclose a more efficient supplier. Since ED promotes the incumbent seller's investment, the seller and the buyer realize a greater surplus from bilateral trade under exclusivity. Hence, the parties involved may sign an ED contract that excludes a more efficient entrant in circumstances where ED would not arise absent investment. The paper therefore invites a more cautious attitude towards accepting possible investment promotion arguments as a defense for ED. © 2012 Blackwell Publishing Ltd and the Editorial Board of The Journal of Industrial Economics.