Exclusionary Discounts

We consider a two-period model with two sellers and one buyer in which the efficient outcome calls for the buyer to purchase one unit from each seller in each period. We show that when the buyer’s valuations between periods are linked by switching costs and at least one seller is financially constrained, there exist plausible conditions under which exclusion arises as the unique equilibrium outcome. The exclusionary equilibria are supported by price-quantity schedules in which the excluding firm offers to sell its second unit to the buyer at a marginal price that is below its marginal cost of production. In some circumstances, the second unit is offered at a negative marginal price. Our findings have policy implications, and they contribute to the literatures on exclusive dealing, bundling, loyalty rebates, all-units discounts, and market-share discounts.