Excluding capacity-constrained entrants through exclusive dealing: theory and an application to ocean shipping

It is determined whether loyalty contracts in ocean shipping can inhibit lower cost capacity-constrained entrants. The competitive effects of exclusive dealing contracts with three players, namely, an incumbent, an entrant who is more efficient but capacity-constrained and a buyer are examined. It is shown that loyalty contracts could be an effective entry barrier and that the result is not socially efficient. Exclusive dealing contracts in the ocean shipping market are examined and are found to give linear conferences an unfair edge.