Excluding capacity-constrained entrants through exclusive dealing: Theory and an application to ocean shipping

This paper considers the competitive effects of exclusive dealing contracts in a three-player game: an incumbent, an entrant who is more efficient but capacity constrained, and a buyer. We show that exclusive dealing contracts may represent an effective entry barrier-the incumbent is able to exclude the smaller entrant from the industry. The outcome is not socially efficient. We then examine the ocean shipping market, where exclusive dealing contracts are a common practice, and capacity consideration is important. We find exclusive dealing contracts in liner shipping may have given linear conferences an unfair advantage.