How Does Downstream Firms’ Efficiency Affect Exclusive Supply Agreements?

We develop a bilateral monopoly model with a downstream entrant to examine anticompetitive exclusive supply contracts that prevent the upstream supplier from selling inputs to the downstream entrant. When the entrant is more efficient and needs a lesser amount of the input that is produced by the su...

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Bibliographic Details
Published in:	Review of industrial organization 2024-03, Vol.64 (2), p.219-242
Main Authors:	Kitamura, Hiroshi, Matsushima, Noriaki, Sato, Misato
Format:	Article
Language:	eng
Subjects:	Agreements Antitrust Arbitrage Competition Economics Economics and Finance Efficiency Incumbency Industrial Organization Laboratories Literature reviews Microeconomics Monopolies Profits Purchasing Suppliers Tariffs Toy industry
Online Access:	Get full text
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Summary:	We develop a bilateral monopoly model with a downstream entrant to examine anticompetitive exclusive supply contracts that prevent the upstream supplier from selling inputs to the downstream entrant. When the entrant is more efficient and needs a lesser amount of the input that is produced by the supplier than does the incumbent, the input demand may not increase significantly following the entry. Therefore, the socially efficient entry does not increase the supplier’s profits significantly, which allows the downstream incumbent to deter socially efficient entry through an exclusive supply contract. This result holds even in the simplest framework, which is composed of a single seller, buyer, and entrant.
ISSN:	0889-938X 1573-7160