DP3493 | Exclusive Dealing and Entry, when Buyers Compete

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Rasmusen et al. (1991) and Segal and Whinston (2000) show that an incumbent monopolist might exclude entry of a more efficient competitor, by exploiting externalities among buyers. We show that their results hold only when downstream competition among buyers does not exist or is weak enough. Under fierce downstream competition, the incumbent cannot compensate a deviant buyer who buys from the more efficient entrant. Any such buyer will become more competitive and increase their output ? thus triggering entry ? and profits at the expense of buyers who sign an exclusive deal with the incumbent. Hence, exclusive deals cannot deter efficient entry.