Abstract
In a recent paper, Fumagalli and Motta (2006) challenge the idea that an incumbent can foreclose efficient entry in the face of scale economies by using exclusive contracts. They establish that inefficient exclusion does not arise when buyers are homogenous firms that compete downstream. Allowing upstream firms to compete in two-part tariffs, I show their equilibrium analysis contains some errors. Fixing these errors, inefficient exclusion becomes possible for large enough scale economies, while Fumagalli and Motta's proposed entry equilibrium does not arise when the entrant's cost advantage is small. Inefficient exclusion arises to protect industry profits from competition.
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