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Relationship-specific investment as a barrier to entry

Author

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  • Hiroshi Kitamura

    (Kyoto Sangyo University)

  • Akira Miyaoka

    (Kansai University)

  • Misato Sato

    (The George Washington University)

Abstract

This study constructs a model of a relationship-specific investment in a dynamic framework. Although such investment decreases operating costs and increases the current joint profits of firms in vertical relationships, its specificity reduces the ex-post flexibility to change a trading partner in the future. We demonstrate that whether the investment contract deters entry even in the absence of exclusionary terms depends on not only the specificity but also the efficiency of the investment. We also show that an increase in the investment efficiency does not necessarily improve the equilibrium social welfare.

Suggested Citation

  • Hiroshi Kitamura & Akira Miyaoka & Misato Sato, 2016. "Relationship-specific investment as a barrier to entry," Journal of Economics, Springer, vol. 119(1), pages 17-45, September.
  • Handle: RePEc:kap:jeczfn:v:119:y:2016:i:1:d:10.1007_s00712-016-0482-8
    DOI: 10.1007/s00712-016-0482-8
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    References listed on IDEAS

    as
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    Cited by:

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    3. Henrik Vetter, 2017. "Pricing and market conduct in a vertical relationship," Journal of Economics, Springer, vol. 121(3), pages 239-253, July.

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    More about this item

    Keywords

    Vertical relation; Entry deterrence; Relationship-specific investment; Switching costs;
    All these keywords.

    JEL classification:

    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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