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Exclusive Contracts When Incumbent Can Establish Direct Retailer

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Law and Economics in Japanese Competition Policy

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Abstract

Exclusive contracts have long been a controversial issue. Once an exclusive contract is signed, it directly deters efficient entrants and reduces welfare. Therefore, exclusive contracts seem to have anticompetitive effects.

This Chapter is based on Hiroshi Kitamura, Misato Sato and Koki Arai (2014) “ Exclusive contracts when the incumbent can establish a direct retailer.” Journal of Economics 112: 47–60.

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Notes

  1. 1.

    see Posner (1976) and Bork (1978).

  2. 2.

    See “Business sense” The Economist, Mar 4, 2004 (http://www.economist.com/node/2458055).

  3. 3.

    Our results may be applicable when antitrust agencies construct guidelines for exclusive dealings. See, for example, Federal Trade Commission’s website: http://www.ftc.gov/bc/antitrust/exclusive_dealing.shtm, where exclusion with scale economies pointed out by Rasmusen et al. (1991) and Segal and Whinston (2000a) is discussed.

  4. 4.

    There also exist works on procompetitive exclusive dealings. Several studies argue that exclusive dealings have a role in encouraging noncontractible investments. See, for example, Marvel (1982), Segal and Whinston (2000b), De Meza and Selvaggi (2007), and De Fontenay et al. (2010).

  5. 5.

    Economists analyze anticompetitive exclusive dealings from not only a theoretical perspective but also an experimental perspective. See, for example, Boone et al. (2009), Landeo and Spier (2009), and Smith (2011).

  6. 6.

    Fumagalli andMotta (2008) also show that exclusion arises because of coordination failure among buyers even when the incumbent does not have a first-mover advantage in making exclusive offers.

  7. 7.

    Wright (2009) also points out that the equilibrium analysis of Fumagalli and Motta (2006) in the case of two-part tariffs contains some errors and shows that exclusion arises when scale economies are sufficiently large or when the entrant’s cost advantage is not too big.

  8. 8.

    Rasmusen et al. (1991) and Segal and Whinston (2000b) point out that price commitments are unlikely if the nature of the product is not precisely described in advance. In the naked exclusion literature, it is known that if the incumbent can commit to wholesale prices, then anticompetitive exclusive dealings are enhanced. See Yong (1999) and Appendix B in Fumagalli and Motta (2006).

  9. 9.

    This assumption implies that entry by the entrant takes a longer time than the establishment of a direct retailer. Therefore, we can interpret the entrant here as a foreign company or a capital-intensive company because these firms take more time to find a business partner, raise funds, and make investments in plant and machinery.

  10. 10.

    The establishment cost of a direct retailer tends to be small in an industry where downstream firms are labor intensive rather than capital intensive or small companies rather than large companies.

  11. 11.

    Katz (1991) points out that unobservable offers are more realistic than observable offers. This assumption avoids multiple equilibria. See Section III of Fumagalli and Motta (2006) and Section III of Simpson and Wickelgren (2007), wherein it is pointed out that if each retailer can observe the wholesale offer made to its rival, then there exist both an exclusion equilibrium and an entry equilibrium. Note that introducing differentiation between retailers also avoids multiple equilibria even under observable contracts, though the analysis does become a bit complicated. See Simpson and Wickelgren (2007) who point out that if retailers are not perfectly homogeneous but differentiated, then only the exclusion equilibrium is robust.

  12. 12.

    Although the unobservable wholesale price offer solves the multiple equilibrium problem, it generates the commitment problem in Hart and Tirole (1990) that arises when a single upstream manufacturer sells to two competing retailers with two-part tariffs under unobservable wholesale contracts and passive beliefs. Following Rey and Verg (2004), Abito and Wright (2008) avoid the commitment problem when only the incumbent makes a wholesale price offer by assuming symmetric beliefs. We also follow this assumption.

  13. 13.

    See, for example, Baake and von Schlippenbach (2011) for recent studies on vertical relations in the presence of long-term buyer-seller relationships.

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Authors and Affiliations

  1. Faculty of Management and Administration, Shumei University, Yachiyo, Chiba, Japan

    Koki Arai

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Correspondence to Koki Arai .

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Arai, K. (2019). Exclusive Contracts When Incumbent Can Establish Direct Retailer. In: Law and Economics in Japanese Competition Policy. Springer, Singapore. https://doi.org/10.1007/978-981-13-8188-1_7

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