Working Paper: CEPR ID: DP15520
Authors: Giacomo Calzolari; Vincenzo Denicol
Abstract: Contracts that reference rivals' volumes (RRV contracts), such as exclusive dealing or market-share rebates, have been a long-standing concern in antitrust because of their possible exclusionary effects. We show, however, that it is more profitable to use these contracts to exploit rivals rather than to foreclose them. By optimally designing RRV contracts, a dominant firm may, indeed, obtain higher profits than if it were an unchallenged monopolist. In the most favorable cases, it can earn as much as if it could eliminate the competition and acquire the rivals' specific technological capabilities free of charge.
Keywords: exploitation; foreclosure; market-share discounts; exclusive dealing
JEL Codes: D42; D82; L42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| RRV contracts (L14) | higher profits for the dominant firm (L21) |
| dominant firm (L10) | exploit rivals (D43) |
| optimal contract design (D86) | bundling effect (D43) |
| RRV contracts (L14) | increase pricing power (D49) |
| RRV contracts (L14) | extract rents from rivals (D43) |
| use of RRV contracts (R50) | distortion of marginal prices (D40) |
| profitability under RRV contracts (L14) | exceed that of a monopolist (D42) |