There might be no consensus among economists as regards the treatment that vertical restraints should receive under competition policy but we feel it is a bit harsh to state that there are no standard models.

When it comes to exclusivity contracts, two main “theories of harm” are regularly used in the academic and policy literature. The first one stems from the Aghion and Bolton (1987) article and focuses on the possibility for existing market participants to use exclusivity contracts as a way to force the entrant to lower its price (thus generating surplus for the parties but making entry less profitable). The second theory is associated with the “naked exclusion” scenario first put forward by Ramseyer, Rasmusen and Wiley (1990). In this scenario, the entrant needs the patronage of several big buyers in order to recover its entry cost. The incumbent can play on the coordination problems of those buyers so as to induce enough of them to sign an exclusivity contract that effectively deters entry.

There are two ways to look at the objection raised by Guy as regards the set-up of Aghion and Bolton (1987):

First, it is true that the entrant does not sit at the negotiation table! If he could make an offer at the same time as the incumbent, or if all parties could sit and renegotiate post-entry under full information, only efficient outcomes would be reached. This is a version of the Coase theorem and it is actually at the core of the Chicago critique of antitrust. However, costless, universal bargaining is a strong assumption. If true, there would be no need to go beyong cartel-busting in the field of competition policy, as article 82 abuses would not arise, only efficient outcomes! Post-Chicago models precisely stress that incumbents may have a first-mover advantage and that post-entry various obstacles (including the very existence of competition policy) may prevent the incumbent and the entrant from striking a deal.

Second, Spier and Whinston (1995) have stressed that a contract may actually be the wrong instrument for a contracting pair to commit to inefficient outcomes. In all jurisdictions, contracts are typically renegotiable and indeed, post-entry, if the cost of the entrant is observable, the incumbent and the buyer have an incentive to undo their exclusivity contract and accept the offer of the entrant whenever the latter can produce at a cheaper cost than the incumbent. Yet, if the cost of the entrant is not observable, this incentive disappears. Moreover, internal agency problems may actually restore the commitment value of contracts by making it costly for a firm to rengotiate its contracts ex-post. As a matter of fact, in most firms, the sales department and the legal department are separate and face very different incentives!

All in all, we believe that Guy’s criticims does not invalidate the relevance of the class of models to which our paper belongs but it is a useful reminder that “harm” will not occur whenever market participants have ways to adjust or go around the situation created by the existence of long-term contracts. Hence, competition authorities should always check that the alleged victim of an exclusionary practice indeed had no way to devise an effective counter-strategy (making an early, attractive offer to buyers, negotiating market access with existing sellers, etc) in order to prove the infringement.

Cedric and Bert analyze risk hedging and foreclusion by long term contracts. The main problem of long term contracts is related to exclusionary clauses which can be used to foreclose an efficient entry. The European competition authorities are well aware of that issue and are very suspicious toward dominant firm long term contracts and particularly exclusionary ones.

However, the academic debate is still vivid on long term contract, and there is no clear consensus and standard model to analyze them – as there is for merger with trade-off between market power increase and efficiency gains. There is a lot we do not understand and particularly on their effect on investment, An illustration of the debate among economists is the criticism made by Spier and Winston (1997) on the work of Aghion and Bolton (1987). As Argenton and Willems use the same framework as Aghion and Bolton this criticism is worth mentioning. Aghion and Bolton (1987) assume that the incumbent firm cannot negotiate with the entrant. If it were the case, the incumbent firm would buy electricty to the entrant to fulfill its contractual obligation if the entrant is more efficient than the incumbent. In that case the exclusionary clause no longer impedes economic efficiency.

Aghion, Philippe and Patrick Bolton (1987), “Contracts as a Barrier to Entry,” American
Economic Review, 77 (3), pp.388-401.

Spier, Kathy E. and Michael D.Whinston (1995), “On the Efficiency of Privately Stipulated
Damages for Breach of Contract: Entry Barriers, Reliance, and Renegotiation,” RAND
Journal of Economics , 26 (2), pp.180-202.

However