Exclusive dealing with network effects

Abstract

This paper explores the ability of an incumbent to use introductory offers to dominate a market in the face of a more efficient rival when network effects rather than scale economies are present. Both in the case of one-sided and two-sided markets, for introductory offers to be profitable when consumers can multihome, they need to be discriminatory and exclusive. In this setting, exclusivity as opposed to just commitment to purchase is critical - consumers must commit not to purchase from the rival in the future in order that introductory offers can work. The use of such contracts is anticompetitive and inefficient but does not necessarily result in complete foreclosure. © 2009 Elsevier B.V. All rights reserved.