Nonlinear Supply Contracts, Foreclosure, and Exclusive Dealing

Abstract

We examine the incentives for market foreclosure when two upstream firms contract with a retail monopolist. We find that if nonlinear supply contracts are feasible, an exclusive dealing arrangement offers an upstream firm no advantage it would not have had without the arrangement. If a fully integratred (horizontally and vertically) firm would sell only one product, an upstream firm can foreclose its rival with a nonlinear supply contract and achieve the same profit it would receive if it required exclusive dealing. If a fully integrated firm would sell both products, the feasibility of nonlinear supply contracts renders it unprofitable to foreclose, with or without exclusive dealing.