Competition for exclusivity of a superior input and quality implications

Abstract

Two firms compete for exclusivity of a superior input, then choose their quality and price. Exclusive dealing is a unique equilibrium when the input changes the equilibrium quality of at least one firm. Otherwise, there also exists a non-exclusive equilibrium. The quality pass-through of the firm with exclusivity is in general above one, lowers consumer surplus and welfare unless competition is very intense. With demand asymmetry, the big firm wins exclusivity and consumer harm is lower. Banning exclusivity of only the big firm might lower total welfare and consumer surplus compared to no ban. With cost asymmetry, the less efficient firm can win exclusivity. We provide implications for digital platforms. (with Ozlem Bedre-Defolie )