AN ECONOMIC ANALYSIS OF EXCLUSIVE DEALING (FREE-RIDING, EFFICIENCY, FORECLOSURE)

This dissertation studies the economics of exclusive dealing arrangements within a principal-agent framework and concludes that the practice can and has been efficiency-enhancing. An empirical investigation of three prominent antitrust exclusive dealing cases found no contrary evidence.; This analysis focuses on problems faced by the principal which can be solved by prohibiting the agent from dealing with other principals. That is, it concerns problems which are agent-specific. For example, the decline in a producer's sales due to the substitution of another brand for the producer's brand by a retailer to an unsuspecting customer is a problem effectively addressed by the producer who insists on exclusive dealing. However, a competitor can reduce a producer's sales via other retailers who don't sell the producer's product but are located, say, next door. The second problem does not result from the agent's actions and is not resolved by exclusive dealing.; The main point of the analysis is that exclusive dealing results from the inability of principals to effectively monitor their agent's behavior and the ability of an agent to gain at the expense of other agents. A retailer who shares the market with other retailers, for example, will have incentive to reduce the level of effort he applies to the branded good he sells if the consequent fall in sales of the same brand are shared by all the retailers in the market. Product quality will therefore fall below socially optimal levels. Payment schemes in these cases cannot in general alter agent behavior sufficiently because it is not always possible to pay the agent his marginal product when his efforts affect the sales of other retailers and vice-versa. Auxiliary methods of behavioral control, such as exclusive dealing, may therefore be used.