Naked Exclusion with Private Offers
36 Pages Posted: 7 May 2014 Last revised: 19 Feb 2016
Date Written: February 8, 2016
We consider a sellers ability to deter potential entrants by offering exclusive contracts to its downstream buyers. Rasmusen, Ramseyer, and Wiley (1991) showed that this can be a pro fitable strategy if there is a coordination failure on the part of the buyers. Segal and Whinston (2000) showed that the seller need not rely on a coordination failure if it can make discriminatory divide-and-conquer offers. These papers and the literature that followed has assumed that all offers are public. We show that if buyers cannot observe each other's offers and have passive or wary out-of-equilibrium beliefs, the divide-and-conquer exclusion strategy fails. Equilibria in which the incumbent obtains exclusion for free due to a coordination failure on the part of the buyers, on the other hand, exist for all out-of-equilibrium beliefs.
Keywords: exclusive dealing, divide-and-conquer offers, unobservable contracts, entry deterence
JEL Classification: L13, L41, L42
Suggested Citation: Suggested Citation