SSE/EFI Working Paper Series in Economics and Finance
Abstract: It is shown in this study that in the case of vertically
differentiated products, Bertrand competition at the retail level does not
prevent an incumbent upstream firm from using exclusivity contracts to
deter the entry of a more efficient rival, contrary to what happens in the
homogenous product case. Indeed, because of differentiation, the
incumbent's inferior product is not eliminated upon entry. As a result, a
retailer who considers rejecting the exclusivity clause expects to earn
much less than the incumbent's monopoly rents. Thus, in equilibrium, the
incumbent can always offer high enough an upfront payment to induce all
retailers to sign on the contract.
Keywords: vertical differentiation; contracts; exclusion; monopolization; (follow links to similar papers)
JEL-Codes: L12; L42; (follow links to similar papers)
37 pages, October 18, 2006, Revised June 5, 2007
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