Can Naked Exclusion Be Procompetitive?

Antitrust scholars have argued that exclusive contracts have
anticompetitive, or at best neutral effects, if no efficiencies are
generated. In contrast, this paper shows that exclusive contracts
can have procompetitive effects, provided buyers are imperfect
downstream competitors and contract breach is feasible. In that
case an efficient entrant is not necessarily foreclosed through
exclusive contracting but induces buyers to breach. Because
breaching buyers have to pay expectation damages to the incumbent,
the downstream profits they obtain when breaching must be large
enough. Therefore, the entrant needs to set a lower wholesale price
than absent exclusive contracting, leading to lower final consumer
prices and higher welfare.