Recent economic analyses of vertical restraints and integration emphasize the circumstances under which these arrangements are socially efficient. Efficiency claims have proven contentious, however, for exclusive dealing, a vertical restraint that prohibits any outlet carrying a manufacturer's product from stocking substitute brands. This paper analyzes the impact of exclusive dealing on competition and allocative efficiency. Opinions expressed on the impact of exclusive dealing range from the extreme view that it is invariably anticompetitive, to the view that it is always procompetitive. The U.S. Supreme Court has concluded that in hundreds if not thousands of communities where there is a single retailer for a product,

This paper offers a simple approach to the theory of decentralizing inventory and pricing decisions along a supply chain. We consider an upstream manufacturer selling to two outlets, which compete as differentiated duopolists and face uncertain demand. Demand spillovers between the outlets arise in the event of stockouts. The price mechanism, in which each outlet pays a two-part price and chooses price and inventory, virtually never coordinates incentives efficiently. Contracts that can elicit first-best decisions include resale price floors or buy-back policies (retailer-held options to sell inventory back to the manufacturers).