Buyer-Induced Exclusive Dealing

Abstract

Large retailers may exercise buyer power in their interactions with manufacturers. This article explores the use of exclusive dealing arrangements by a monopoly retailer when purchasing a differentiated product from competing manufacturers. Interactions among the firms are modeled as a bargaining game. When consumers' brand preferences are weak and/or when one brand is preferred by a significant majority of consumers, it is more profitable for the retailer to negotiate an exclusive dealing arrangement with one of the manufacturers than to distribute both products. Also, it is more profitable for the retailer to induce exclusive dealing if the manufacturer of the excluded brand has a lot of bargaining power when negotiating with the retailer. If buyer-induced exclusive dealing reduces the retail price of the exclusive brand in order to encourage “brand switching” by consumers who favor the excluded brand, the practice may increase consumer welfare and even total welfare.