Excluding Capacity-Constrained Entrants through Exclusive Dealing: Theory and an Application to Ocean Shipping

This paper considers the competitive effects of exclusive dealing contracts in a three-player game: an incumbent, an entrant who is more efficient but capacity constrained, and a buyer. The author shows that exclusive dealing contracts may represent an effective entry barrier--the incumbent is able to exclude the smaller entrant from the industry. The outcome is not socially efficient. The author then examines the ocean shipping market, where exclusive dealing contracts are a common practice and capacity consideration is important. He finds exclusive dealing contracts in liner shipping may have given linear conferences an unfair advantage. Copyright 1996 by Blackwell Publishing Ltd.