Working Paper: CEPR ID: DP10176
Authors: Volker Nocke; Patrick Rey
Abstract: We develop a model of interlocking bilateral relationships between upstream firms (manufacturers) that produce differentiated goods and downstream firms (retailers) that compete imperfectly for consumers. Contract offers and acceptance decisions are private information to the contracting parties. We show that both exclusive dealing and vertical integration between a manufacturer and a retailer lead to vertical foreclosure, to the detriment of consumers and society. Finally, we show that firms have indeed an incentive to sign such contracts or to integrate vertically.
Keywords: bilateral contracting; exclusive dealing; foreclosure; vertical merger; vertical relations
JEL Codes: D43; L13; L42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| exclusive dealing (L14) | vertical foreclosure (L22) |
| vertical integration (L22) | vertical foreclosure (L22) |
| vertical foreclosure (L22) | negative impact on consumers and society (F61) |
| exclusive dealing (L14) | higher prices (D49) |
| vertical integration (L22) | higher prices (D49) |
| higher prices (D49) | reduced consumer welfare (D69) |