Equilibrium Incentives for Exclusive Dealing in a Differentiated Products Oligopoly

We consider the incentives for oligopolistic manufacturers to adopt exclusive dealing. Manufacturers producing differentiated brands can choose to distribute through exclusive retail dealerships or nonexclusive dealerships. With nonexclusive dealing, manufacturers face an interbrand externality because brand-enhancing investments made by one manufacturer may benefit the brands of other manufacturers. Although exclusive dealing eliminates this externality, oligopolistic manufacturers may not choose exclusive dealing. Exclusive dealing enhances the incentive to invest, but the promotional investments are a form of competition between manufacturers. Thus, manufacturers might earn higher profits with nonexclusive dealing making lower promotional investments. We find cases in which nonexclusive dealing is a dominant strategy. We also find cases in which some, but not all, manufacturers adopt exclusive dealing. Moreover, even if adoption of exclusive dealing by all manufacturers is the equilibrium, it can arise from a prisoner's dilemma in that each manufacturer would prefer nonexclusive dealing.