DP4902 | Exclusive Dealing, Entry and Mergers

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We extend the literature on exclusive dealing by allowing the incumbent and the potential entrant to merge. This uncovers new effects. First, exclusive deals can be used to improve the incumbent?s bargaining position in the merger negotiation. Second, the incumbent finds it easier to elicit the buyer?s acceptance than in the case where entry can occur only by installing new capacity. Third, exclusive dealing reduces welfare because (i) it may trigger entry through merger whereas de novo entry would be socially optimal, and (ii) it may deter entry altogether. Finally, we show that when exclusive deals include a commitment on future prices they will increase welfare.