1. 10 marks). In the Exclusive dealing and Uncertain Entry model explain why exclusive dealing contracts are accepted by buyers and are profitable for incumbents even if they do not deter entry. Explain why exclusive dealing contracts reduce welfare if they result in entry deterrence. Illustrate the profit and welfare consequences of exclusive dealing by solving the "Exclusive Dealing and Uncertain Entry" model done in class for the parameter values indicated below Exclusive Dealing and Uncertain Entry Incumbent cost: c, Entrant cost: ce = cL or cH. Prob(cL) = p, Prob (cH) = 1 - p, Buyer WTP = v Parameter Values: v = 10, c = 5, cL = 3, cH = 4, p = .3

2. (10 marks). In the Exclusive Dealing and Economics of Scale model explain under what circumstances exclusive dealing contracts are accepted by buyers, deter entry and are profitable. Explain why such contracts are welfare reducing. Solve the Exclusive Dealing and Economics of Scale model for the parameter values indicated below to show that exclusive dealing is only profitable if markets are sufficiently small (i.e. N is low). Exclusive Dealing and Economies of Scale N buyers, Buyer demand: q = a - p, AC falls for Q Q*, AC = c, Q > Q* Parameter Values: a = 12, c = 4, Q* = 200