Can exclusionary long-term contracts be justified?

In spite of the Chicago school arguments, it is well known that in certain cases an incumbent firm may use exclusivity contracts so as to monopolize an industry or deter entry. Such an anticompetitive practice could be tolerated if it were associated with sufficiently large efficiency gains, e.g. insuring buyers against price volatility, a rationale that is often invoked to justify long-term contracts in the energy sector. In a recent TILEC discussion paper, TILEC members Cédric Argenton and Bert Willems study the trade-off between the positive effects (risk sharing) and the negative effects (exclusion) of exclusivity contracts. The authors revisit one of the main 'theories of harm' under risk-aversion and show that although exclusivity contracts induce optimal risk-sharing, they can be used not only to deter the entry of a more efficient rival on the product market, but also to crowd out financial investors willing to insure buyers at competitive rates. They further show that in a world without financial investors, purely financial bilateral instruments, such as forward contracts, achieve optimal risk sharing without distorting product market outcomes. Thus, they argue there is no room for an insurance defense of exclusivity contracts.