Naked exclusion with heterogeneous buyers

Abstract

We investigate the effects of buyer heterogeneity in a market where an incumbent firm deters entry when it signs enough exclusionary contracts with buyers. With heterogeneous buyers, several well-known results in exclusionary contracting with homogenous buyers are overturned and novel ones emerge. First, inefficient equilibria exist in which exclusionary contracts are signed but entry still occurs, and the loss of consumer surplus falls on small buyers. Second, sequential contracting may be more pro-competitive than simultaneous contracting in the sense that entry occurs under sequential but not simultaneous contracting. When this happens, sequential contracting Pareto dominates simultaneous contracting. We extend our analysis to consider downstream competition and breach of contract.