Exclusionary Practices and Entry Under Asymmetric Information

A firm entering a market often has to solve the problem that consumers do not know the quality of its product. The present paper, studying entry by a firm facing an incumbent rival, shows that the latter's reaction to entry can work as a substitute for the entrant's revelation costs. As a particular case, when firms use retailers to sell their goods, the incumbent can decide whether or not to apply an exclusive dealing clause. Since the incumbent's strategy entails enforcement of the clause only against a low quality entrant, shared retailing reveals to consumers that the entrant's quality is high, and the asymmetric information problem is solved. If the possibility of exclusion is prohibited, the equilibria with entry by the high quality are destroyed. More generally, the discretionary use of exclusionary practices, or of comparative advertising, can solve the asymmetric information problem for the entrant, thereby facilitating entry.