The Competitive Effects of Vertical Agreements: Comment
Abstract
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.
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