Downstream Competition, Exclusive Dealing and Upstream Collusion

Abstract

This paper analyzes the impact of exclusive dealing contracts between upstream and downstream firms of a vertical channel on the scope for upstream collusion. We consider a double duopoly framework and study upstream collusive strategies in a repeated game, alternatively in the benchmark where firms agree on simple linear tariff contracts, and when they may sign exclusivity contracts. We alternatively assume perfect competition at one level (either upstream or downstream) while there is imperfect competition at the other level. We show that when upstream competition is perfect, exclusivity contracts have no role on the scope for collusion. On the contrary, when downstream competition is perfect, exclusive dealing contracts may either facilitate or deter upstream collusion in comparison with linear tariffs, depending on the strength of competition at both levels. We show that when interbrand competition is soft, collusion is easier to sustain when producers can offer exclusive dealing contracts to retailers than when they cannot, whereas when interbrand competition is fierce, exclusive dealing contracts deter collusion.