The Use of Exclusive Contracts to Deter Entry

This paper shows that an upstream monopolist that sells to competing downstream firms can profitably use exclusive contracts to deter entry even where scale economies are absent. By offering downstream firms a discount if they sign an exclusive contract covering later periods, the incumbent monopolist can often place each downstream firm in a prisoner’s dilemma. Because a downstream firm that refuses to sign the exclusive contract loses profit to downstream firms that sign the exclusive contract, downstream firms will sign exclusive contracts even when, over the long-term, they would obtain the upstream good at a lower price if they all refused to sign.