Entry deterring effects of contractual relations in the dairy processing sector

Addressing the competitive imbalances in the dairy sector, the High Level Group of dairy market experts proposed written formal contracts between raw milk producers and processors to improve the bargaining position of producers and to stabilize milk supply. However, exclusive contracts, where a farmer is obliged to deliver his whole production amount to one dairy only, may lead to the opposite effect as they may deter market entry of rival dairies. We develop a theretical model and show that an incumbent dairy can deter entry of a rival dairy when the farmer is risk averse.