Exclusive quality

Research output: Contribution to journalArticleScientificpeer-review

Abstract

In the case of vertically differentiated products, Bertrand competition at the retail level does not prevent an incumbent upstream firm from using exclusivity contracts to deter the entry of a high-quality rival. Indeed, because of differentiation, the incumbent's inferior product is not eliminated upon entry. Due to the resulting competitive pressure, a retailer who considers rejecting the exclusivity contract expects to earn much less than the incumbent's monopoly rents. Thus, in equilibrium, the incumbent can always offer high enough an upfront payment to induce all retailers to sign the contract and achieve exclusion. This is true under linear pricing for intermediate levels of entry costs, and with two-part tariffs even in the absence of entry costs.
Original languageEnglish
Pages (from-to)690-716
JournalJournal of Industrial Economics
Volume58
Issue number3
Publication statusPublished - 2010

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Incumbents
Retailers
Exclusivity
Entry costs
Retail
Monopoly
Payment
Bertrand competition
Exclusion
Differentiated products
Two-part tariff
Rent
Pricing

Cite this

Argenton, C. / Exclusive quality. In: Journal of Industrial Economics. 2010 ; Vol. 58, No. 3. pp. 690-716.
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title = "Exclusive quality",
abstract = "In the case of vertically differentiated products, Bertrand competition at the retail level does not prevent an incumbent upstream firm from using exclusivity contracts to deter the entry of a high-quality rival. Indeed, because of differentiation, the incumbent's inferior product is not eliminated upon entry. Due to the resulting competitive pressure, a retailer who considers rejecting the exclusivity contract expects to earn much less than the incumbent's monopoly rents. Thus, in equilibrium, the incumbent can always offer high enough an upfront payment to induce all retailers to sign the contract and achieve exclusion. This is true under linear pricing for intermediate levels of entry costs, and with two-part tariffs even in the absence of entry costs.",
author = "C. Argenton",
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Argenton, C 2010, 'Exclusive quality' Journal of Industrial Economics, vol. 58, no. 3, pp. 690-716.

Exclusive quality. / Argenton, C.

In: Journal of Industrial Economics, Vol. 58, No. 3, 2010, p. 690-716.

Research output: Contribution to journalArticleScientificpeer-review

TY - JOUR

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AU - Argenton, C.

N1 - Appeared earlier as CentER Discussion Paper 2008-20

PY - 2010

Y1 - 2010

N2 - In the case of vertically differentiated products, Bertrand competition at the retail level does not prevent an incumbent upstream firm from using exclusivity contracts to deter the entry of a high-quality rival. Indeed, because of differentiation, the incumbent's inferior product is not eliminated upon entry. Due to the resulting competitive pressure, a retailer who considers rejecting the exclusivity contract expects to earn much less than the incumbent's monopoly rents. Thus, in equilibrium, the incumbent can always offer high enough an upfront payment to induce all retailers to sign the contract and achieve exclusion. This is true under linear pricing for intermediate levels of entry costs, and with two-part tariffs even in the absence of entry costs.

AB - In the case of vertically differentiated products, Bertrand competition at the retail level does not prevent an incumbent upstream firm from using exclusivity contracts to deter the entry of a high-quality rival. Indeed, because of differentiation, the incumbent's inferior product is not eliminated upon entry. Due to the resulting competitive pressure, a retailer who considers rejecting the exclusivity contract expects to earn much less than the incumbent's monopoly rents. Thus, in equilibrium, the incumbent can always offer high enough an upfront payment to induce all retailers to sign the contract and achieve exclusion. This is true under linear pricing for intermediate levels of entry costs, and with two-part tariffs even in the absence of entry costs.

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EP - 716

JO - Journal of Industrial Economics

JF - Journal of Industrial Economics

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