Exclusive dealing contract and inefficient entry threat

This paper examines the effects of exclusive dealing contracts offered by an incumbent distributor to an incumbent manufacturer with entrants in both manufacturing and distribution sectors. It is well-known that a potential entry threat is welfare increasing under homogenous price competition, even though the potential entrant is less productive. This paper reexamines this intuition. We show that the entry threat of a less-productive manufacturer is welfare decreasing when there is an exclusive dealing contract between the incumbent manufacturer and distributor.