Do exclusivity contracts hamper product innovation?

Contractual relationships at various levels in the production chain, although often efficient, may at times be used for anti-competitive purposes. In particular, exclusivity clauses have long been regarded with suspicion because of their direct exclusionary effects. Over the past decades, economists and lawyers have come to a better understanding of the possibilities for dominant firms to use such arrangements so as artificially to maintain their position. Recent pieces have suggested that intense competition among downstream buyers may be enough to prevent dominant upstream firms to seize them. In a recent TILEC discussion paper, Cédric Argenton (TILEC) revisits the main theory of harm (the so-called "naked exclusion" story) in the case when the efficient competitor is not a firm producing at a lower cost but one bringing an innovative, higher-quality product to the market. Contrary to the case of process innovation, when retailers intensely compete with one another, the incumbent firm is always able to exclude the innovative firm. Therefore, intense competition at the retail level is no guarantee that exclusivity contracts are harmless. Competition policy enforcers need to pay more attention than ever to the exact characteristics of the upstream market.