An input supplier selling to competing downstream firms would benefit from publicly committing at the outset to all contracts. Efficient commitment, however, would require complete contracts. We study instead bilateral contracting, without commitment regarding others' terms. Each firm then fears that the supplier might opportunistically renegotiate another's contract to increase bilateral profit at the firm's expense. We show that nondiscrimination clauses generally cannot curb such third-party opportunism, even with symmetric firms. To reassure firms, crude forms of commitment may be adopted. This could explain the pervasiveness of exclusivity arrangements and the striking uniformity and intertemporal rigidity of franchise contracts.

In a recent paper, Comanor and Frech (1985, CF) claim that a manufacturer enjoying a product differentiation advantage could impose exclusive dealing on distributors while also raising its wholesale price. The two consumer groups in the model would then pay higher prices than under nonexclusive dealing. CF also suggest that exclusive dealing is more likely to emerge when product differentiation is relatively strong. CF's analysis does not carefully incorporate the constraints imposed by dealer rationality. Doing so within CF's model, I reach opposite conclusions. Exclusive dealing will be accepted only if the manufacturer reduces its wholesale price to dealers. Relative to nonexclusive dealing, price rises to one group of consumers but falls to the other. Moreover, exclusive dealing is more likely to emerge when product differentiation is relatively weak.

This paper assumes that incumbent firms can create new independent divisions more cheaply than potential entrants, who must incur the additional overhead costs of new entry. The main theoretical result is that such divisionalization ability leads perfectly informed incumbents to preempt all rational entry into their industries. In contrast, existing models of entry deterrence imply that informed incumbents, even those with steadily decreasing average costs, will often allow rational entry. Our result may explain why successful, large-scale entry by firms with no informational advantage is extremely rare. The use of divisions to preempt entry may also explain why large firms in high-profit oligopolies often divisionalize, allowing their divisions to compete freely despite the negative pecuniary externality that each division imposes on others.

Opportunism in Multilateral Vertical Contracting: Nondiscrimination, Exclusivity, and Uniformity: Reply by R. Preston McAfee and Marius Schwartz. Published in volume 94, issue 3, pages 802-803 of American Economic Review, June 2004