Buyer - Induced Exclusive Dealing

Large retailers or distributors may exercise buyer power in their interactions with manufacturers in order to obtain preferential terms of sale. This paper explores the use of exclusive dealing arrangements by a monopoly retailer to win advantageous pricing from competing manufacturers of a differentiated product. When consumers’ brand preferences are weak and/or when one brand is preferred by a significant majority of consumers, it is more profitable for the retailer to negotiate an exclusive dealing arrangement with one of the manufacturers than to distribute every manufacturers’ product. Buyer-induced exclusive dealing may increase consumer welfare if some of the retailer’s savings from negotiating an exclusive deal are passed on to consumers in the form of lower retail prices in order to encourage “brand switching” by consumers who favor the excluded brand. The likelihood that buyer-induced exclusive dealing increases consumer welfare is greater when consumers’ brand preferences are weak and/or when no brand is preferred by a significant majority of consumers. Whether or not consumer welfare increases with buyer-induced exclusive dealing, total welfare always decreases.