Are Exclusive Contracts Anticompetitive?

While antitrust law is often hostile to exclusive contracts that say ”you agree not to purchase this product from anyone besides me”, economic theory so far has provided only partial support for such a hostility.1 This paper shows that this hostility can be justified under more general circumstances than has been established so far in the literature: a firm may introduce exclusivity clauses in its contracts with (some of) its customers in order to drive a rival out of the market by depriving it of the minimal required scale, so as to increase its market power. The first analysis of exclusive contracts emanated from the ”Chicago school”. It came to the conclusion that whenever such contracts are observed, their rationale must be the (socially desirable) protection of upstream firms against free-riding or opportunistic behavior by downstream firms, rather than the (socially harmful) protection or extension of market power. The Chicago school argument is simply that expanding or protecting market power by imposing exclusivity clauses cannot constitute a profitable strategy, because, if such exclusion is socially inefficient, the transfer from the excluding firm to consumers should exceed the incumbent firm’s gain from deterring entry or inducing exit2. ∗Centre National de la Recherche Scientifique (CNRS) and Fédération Paris Jourdan. Address: Cepremap Ecole Normale Supérieure; 48, boulevard Jourdan; 75014 Paris; France. Email: [email protected]. 1See Wiley (1998) for a survey. 2This argument has been made in particular by Posner, (1976, p.212) and Bork (1978,