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Exclusion via Non‐Exclusive Contracts
Author(s) -
Semenov Aggey,
Wright Julian
Publication year - 2014
Publication title -
canadian journal of economics/revue canadienne d'économique
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.773
H-Index - 69
eISSN - 1540-5982
pISSN - 0008-4085
DOI - 10.1111/caje.12076
Subject(s) - allowance (engineering) , downstream (manufacturing) , upstream (networking) , microeconomics , discounting , marginal cost , economics , payment , industrial organization , business , finance , operations management , computer science , computer network
We establish that non‐linear vertical contracts can allow an incumbent to exclude an upstream rival in a setting that does not rely on the exclusivity of the incumbent's contracts with downstream firms or any limits on distribution channels available to the incumbent or rival. The optimal contract we describe is a three‐part quantity discounting contract that involves the payment of an allowance to a downstream distributor and a marginal wholesale price below the incumbent's marginal cost for sufficiently large quantities. The optimal contract is robust to allowing parties to renegotiate contracts in case of entry.