- EXCLUSIVE DEALING CLAUSES FACILITATE ENTRY

Firms willing to enter a market with a new product often face the problem that the market does notknow its quality. Selling through a retailer might avoid excessive entry costs by renting thereputation of an incumbent. The incumbent can apply excusive dealing clauses to his retailer. Weshow that the incumbent enforces the clause only againts low quality entrants and that exlusivedealing clauses lead to a more fragmented industry and improve welfare. However, if theincumbent can undertake e.g. brand differentiating investments at the retailer (which are welfareenhancing under perfect information), the overall effect of exlusive dealing clauses may be welfarereducing under asymmetric information.