Exclusive Versus Non-exclusive Dealing in Auctions with Resale

We consider a seller who can either sell exclusively through resellers, or allow potential consumers to purchase directly from him. The consumers’ willingness to pay is private information. All transactions are in the form of second-price sealed bid auctions. We show that, if the resellers can gain access to a substantially bigger portion of the market than the seller himself, the seller obtains a higher revenue by dealing exclusively through them, i.e., by committing to not sell to any consumer. The result is due to a “winner’s curse” effect: the resellers win only if the consumers that they compete against submit lower bids, i.e., if part of their customer base has low valuations. This depresses the resellers’ willingness to pay relative to what they would be willing to pay under an exclusive resale contract. Our results do not depend on the presence of transaction costs: exclusive dealing yields strictly higher revenue even when the resellers can market the item at zero cost. We would like to thank Richard Engelbrecht-Wiggans, Michael Rothkopf and seminar participants at Iowa State University, the Midwest Mathematical Economics meetings, the Milken Institute, Rutgers University, SUNY at Stony Brook Summer Workshop on Game Theory, for helpful comments and suggestions.