NONLINEAR SUPPLY CONTRACTS, EXCLUSIVE DEALING, AND EQUILIBRIUM MARKETFORECLOSURE

We examine how the feasibility of both nonlinear pricing and exclusive dealing arrangements affect incentives for market foreclosure when tw o manufactures contract with a retail monopolist. Surprisingly, we fin d that although market foreclosure equilibria exist, they are Pareto-d ominated (from each manufacturer's perspective) by all nonforeclosuue equilibria. If one believes that Pareto-dominated equilibria ave unlik ely to arise, then the difference between our results and those of Mat hewson and Winter (1987), who do not allow for nonlinear pricing, sugg ests an ironic twist on the notion that quantity discounts and other k inds of nonlinear pricing can provide an additional way for a manufact urer to foreclose a rival. By providing a manufacturer with increased flexibility (beyond linear pricing) to extract a retailer's surplus, n onlinear pricing may instead have the effect of reducing the incidence of observed market foreclosure.