Non-linear Contracts, Foreclosure, and Executive Dealing

Abstract

This paper examines the nature of upstream rivalry in non-linear supply contracts with and without exclusive dealing. We find that foreclosure can occur without exclusive dealing, if economies of scale are sufficiently large, as well as with exclusive dealing. Surprisingly, however, it is the retailer and not the upstream firms who benefit. This formalizes the view that exclusive dealing will not be initiated by supplier because retailer compensation is too steep. It also implies that anticompetitive foreclosure is more likely to occur when downstream firms have bargaining power.