Exploiting Rivals' Strengths

Abstract

Contracts that reference rivals' volumes (RRV contracts), such as exclusive dealing or market-share rebates, have been a long-standing concern in antitrust because of their possible exclusionary effects. We show, however, that it is more profitable for dominant firms to use these contracts to exploit rivals rather than to foreclose them. By designing RRV contracts so that rivals stay active but are marginalized, a dominant firm may obtain higher profits than if it were an unchallenged monopolist. In the most favorable cases, it can earn as much as if it could eliminate the competition and acquire the rivals' specific technological capabilities free of charge. Besides being more profitable, exploitative strategies are also generally less anti-competitive than traditional exclusionary strategies.