Exclusionary Contracts

When do participants in a market have the incentive to enter into agreements that exclude potential entrants? This paper synthesizes, extends and illustrates the theory of exclusionary contracts. In a model of incumbent contracts with downstream buyers, a "Chicago benchmark" yields no incentive for exclusionary long term contracts. Departures from the benchmark in each of three directions yield predictions of exclusion. These include the two existing theories (Aghion-Bolton 1987 and Rasmusen-Ramseyer-Wiley 1991) as well as a third, vertical theory: that a long term contract at one stage of a supply chain may extract rents at another stage. Contracts with upstream suppliers do not necessarily yield a first-mover advantage for the incumbent. We consider upstream contracts in which firms bid simultaneously for the rights to upstream inputs, with bids for exclusive rights being an available strategy, and then compete in a downstream market. With sufficient complementarity upstream and substitutability downstream, the bidding game equilibrium allocates all inputs to a single firm – excluding the other firm from the market. We examine an antitrust case that illustrates all four channels for exclusionary contract incentives.