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Author(s) -
ARGENTON CÉDRIC
Publication year - 2010
Publication title -
the journal of industrial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.93
H-Index - 77
eISSN - 1467-6451
pISSN - 0022-1821
DOI - 10.1111/j.1467-6451.2010.00424.x
Subject(s) - monopoly , economic rent , competition (biology) , business , quality (philosophy) , product differentiation , microeconomics , industrial organization , payment , bertrand competition , downstream (manufacturing) , upstream (networking) , product (mathematics) , commerce , economics , oligopoly , marketing , cournot competition , finance , telecommunications , ecology , philosophy , geometry , mathematics , epistemology , computer science , biology
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 high‐quality rival. Indeed, because of differentiation, the incumbent's inferior product is not eliminated upon entry. Due to the resulting competitive pressure, a retailer who considers rejecting the exclusivity contract 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 the contract and achieve exclusion. This is true under linear pricing for intermediate levels of entry costs, and with two‐part tariffs even in the absence of entry costs.