Exclusive Dealing And Shanzhai

Previous papers argue that exclusive dealing can deter entry in the presence of multiple independent buyers and thus market failure occurs. It is shown that allowing an upstream entrant (E) to eliminate downstream entry barriers can correct such market failure.When the cost of eliminating downstream entry barriers is high enough, exclusion fails and Shanzhai doesn't emerge, and thus all players except the upstream incumbent (Ⅰ), even including downstream oligopolists, are beneficiaries, increasing social welfare. In other words, the correction is perfect.Otherwise, the correction is imperfect. In this case, exclusion succeeds and Shanzhai may emerge. E, Shanzhai firms, and consumers benefit at the expense of I and downstream oligopolists. However, social welfare still increases.When Shanzhai emerges, the price and profit of all firms are the same as the case of downstream perfect competition if the cost advantage of E is sufficiently big, otherwise, the price and profit of I, E and downstream oligopolists are higher than the case of downstream perfect competition, and E enjoys both the advantage of downstream perfect competition and that of downstream imperfect competition.Tolerating Shanzhai can substitute conventional antitrust enforcement and correct the market failure caused by exclusive dealing, and thus should not be prohibited. Moreover, if appropriate antitrust policy is imposed, Shanzhai wouldn't emerge at all.In most cases, the conclusions above are robust even if intellectual property right (IPR) infringement is considered. Only under restrictive assumptions, Shanzhai firms as IPR infringers would destruct the whole industry and should be prohibited, but exclusive dealing must be prohibited simultaneously.