Exclusive Dealing: Investment Promotion May Facilitate Inefficient Foreclosure


  • This paper is a substantially revised version of our working paper, ‘Exclusive Dealing: Investment Promotion May Facilitate Inefficient Foreclosure’ (CEPR DP No. 7240 and IGIER WP No. 393). We are extremely grateful to Estelle Cantillon, Roman Inderst, Chiara Mosca, Marco Ottaviani, Fausto Panunzi, Martin Peitz, Patrick Rey and Giancarlo Spagnolo for their valuable suggestions. We also thank seminar participants at the 10th CEPR Conference on Applied Industrial Organization (Mannheim), Zurich University, EARIE 2008 (Toulouse), CIE Workshop 2007, CSEF-IGIER Symposium on Economics and Institutions (IV edition), the Intertic Conference on Endogenous Market Structure (Milano Bicocca), CREST-INSEE (Paris), 2007 ASSET Meeting (Università di Padova), Erasmus University (Rotterdam), Tel Aviv University, Tilburg University, European University Institute (Florence), and Bocconi University (Milan). We are particularly grateful to the Editor and three anonymous referees for suggestions that helped us to improve the paper considerably. Chiara Fumagalli gratefully acknowledges financial support from MIUR (PRIN 2007). Massimo Motta gratefully acknowledges financial support from the Spanish Ministry of Science and Innovation (MICINN), through project ECO2010-15052.


This paper studies a model whereby exclusive dealing (ED) can both promote investment and foreclose a more efficient supplier. Since ED promotes the incumbent seller's investment, the seller and the buyer realize a greater surplus from bilateral trade under exclusivity. Hence, the parties involved may sign an ED contract that excludes a more efficient entrant in circumstances where ED would not arise absent investment. The paper therefore invites a more cautious attitude towards accepting possible investment promotion arguments as a defense for ED.