The Competitive Effect of Exclusive Dealing in the Presence of Renegotiation Breakdown

This paper analyzes the seller’s incentive to write exclusive contracts with buyers (“exclusive dealing”) and the welfare implications of such contracts in the presence of renegotiation breakdown whereby exclusive dealing is able to affect both the incumbent seller’s investment and a rival’s entry. The analysis shows that the probability of renegotiation breakdown plays a central role in determining the competitive effect of exclusive dealing. Exclusivity is likely to be anticompetitive for intermediate levels of renegotiation breakdown risk, while it is likely to be procompetitive for a very low breakdown risk under linear pricing (and for a very high breakdown risk under two-part tariffs). The result suggests that the competitive effect of exclusive dealing is decided by the interaction between investment promotion and foreclosure, which in turn depends on the probability of renegotiation breakdown and the pricing scheme that sellers can choose. Copyright Springer Science+Business Media New York 2015