Abstract
In the prevailing literature on exclusive contracts it has been argued that manufacturers will engage in using exclusive contracts when products are undifferentiated, and will never sign such contracts, if the products are highly differentiated. This result, however, depends crucially on the fact that the upstream market is supposed to be monopolistic. The results change if we consider multiplayer upstream market. As we show in this paper, the manufacturers engage in exclusive contracting when the product differentiation is strong. In this case an exclusivity will solve the problem of contract externality. If the products are less differentiated the manufacturers experience a prisoner’s dilemma, where, by having an incentive to solve the externality problem, a unilateral switch leads to a lower profit. In this case manufacturers will offer non-exclusivity to the retailers.
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