Exclusive dealing, preferential dealing, and dynamic efficiency

Several recent antitrust cases brought by the U.S. Department of Justice ha ve challenged exclusive dealing by firms with market power. This paper revi ews the legal treatment of exclusive dealing and analyzes the economic impl ications of contracts that penalize customers for trading with a rival supp lier. These contracts include arrangements that make it more costly for cus tomers to trade with a rival (preferential dealing) as well as contracts th at prohibit such trades (exclusive dealing). The analysis assumes that buye rs and sellers negotiate efficiently, so the focus is on the implications o f contract terms for investment behavior (dynamic efficiency). When investm ent is limited to the entrant, the optimal contract between a monopoly sell er and a buyer imposes a socially excessive penalty for trade with a rival. The paper contrasts the dynamic efficiency consequences of contractual pen alties and volume discounts. Both penalties and volume discounts reduce a c ustomer's gains from trade with rival firms. However, in many circumstances , penalties harm dynamic efficiency because they lower a rival firm's margi nal incentives to invest.