Volker Nocke, and Patrick Rey, “Exclusive Dealing and Vertical Integration in Interlocking Relationships”, TSE Working Paper, n. 14-515, July 2014, revised July 2016.
We develop a model of interlocking bilateral relationships between upstream manufacturers that produce differentiated goods and downstream retailers that compete imperfectly for consumers. Contract offers and acceptance decisions are private information to the contracting parties. We show that both exclusive dealing and vertical integration between a manufacturer and a retailer lead to vertical foreclosure, at the detriment of consumers and society. Finally, we show that firms have indeed an incentive to sign such contracts or to integrate vertically.