How Does Downstream Firms' Efficiency Affect Exclusive Supply Agreements?

We provide a bilateral monopoly model with a downstream entrant to examine anticompetitive exclusive supply contracts that prevent the upstream supplier from selling input to the new downstream entrant. When the entrant is efficient regarding the technology to transform input produced by the supplier, the input demand cannot increase significantly through the entry. More importantly, considering socially efficient entry, the supplier cannot earn large profits. Hence, the inefficient downstream incumbent can deter socially efficient entry through exclusive supply contracts, even in the framework of the Chicago School argument, which comprises a single seller, buyer, and entrant