Exclusive Dealing in a Spatial Model of Retail Competition

This paper analyzes exclusive dealing in a model with band differentiation by manufacturers and spatial differentiation by retailers. Exclusive dealing is shown to generate higher profits for manufacturers, who thus have an incentive to insist on exclusive dealing. Exclusive dealing also results in higher prices and higher transportation costs for consumers. However, exclusive dealing may still increase total surplus because it reduces the fixed costs of retailing. If so, the comparision with non-exclusive dealing becomes difficult because these lower fixed costs induce entry of additional retailers, reducing the retail margin and consumer's transportation costs. Numerical analysis suggests that total surplus is likely to increase with exclusive dealing when there are substantial reduction in the fixed costs of retailing.