Collective Exclusion Explored in New Paper by Analysis Group Vice President Claudio Calcagno
January 07, 2019
Most of the economics literature on exclusionary conduct (or foreclosure) has focused on exclusion as a unilateral practice – that is, one in which one firm has sufficient market power to exclude rivals or entrants. Very few studies explore collective exclusion, where a group of firms jointly have the ability and the incentive to exclude a competitor from a market. This gap is addressed by “Collective Exclusion,” a paper coauthored by Analysis Group Vice President Claudio Calcagno and published in the March 2019 issue of the International Journal of Industrial Organization.
Dr. Calcagno’s article, coauthored with Dr. Liliane Giardino-Karlinger of the European Commission’s chief economist team at the Directorate-General for Competition (DG Comp), considers a scenario in which two vertically integrated firms can either exclude a more efficient downstream entrant from the market for a final good or accommodate the entrant. As standard economic theory would predict, coordination by accommodating the downstream entrant yields higher profits to the incumbents, since the entrant’s productive efficiency can be monetized and extracted by the incumbents through suitable contracting. However, such coordination suffers from a potential hold-up problem, whereby the incumbents may have an incentive to undercut the entrant in the final market after selling to the entrant at the wholesale level. The authors’ model predicts that, under certain circumstances, collective exclusion will be the likely outcome. The article therefore sets out the underlying rationale for the emergence of exclusion due to drivers that had not previously been considered.