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Please Hold me Up: Why Firms Grant Exclusive Dealing Contracts

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  • David de Meza
  • Marianno Selvaggi

    ()

Abstract

Why do irreplaceable firms with a choice of suppliers or customers deliberately expose themselves to the threat of hold up by contracting ex ante to deal with only one of them? Our explanation revolves around the multiple equilibria intrinsic to situations of unverifiable investment and many traders. Exclusive dealing eliminates inefficient equilibria in which too many firms invest too little. The enhanced ex post bargaining power of the chosen firm is beneficial for incentives whilst the distributional impact is more than offset in the ex ante negotiations over which this firm obtains the access privilege.

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Bibliographic Info

Paper provided by Department of Economics, University of Bristol, UK in its series The Centre for Market and Public Organisation with number 03/066.

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Length: 30 pages
Date of creation: Apr 2003
Date of revision:
Handle: RePEc:bri:cmpowp:03/066

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Keywords: exclusive dealing; hold-up; renegotiation;

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References

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  2. McAfee, R Preston & Schwartz, Marius, 1994. "Opportunism in Multilateral Vertical Contracting: Nondiscrimination, Exclusivity, and Uniformity," American Economic Review, American Economic Association, vol. 84(1), pages 210-30, March.
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Cited by:
  1. Chrysovalantou Milliou, 2004. "Exclusive Dealing And Compatibility Of Investments," Economics Working Papers we044919, Universidad Carlos III, Departamento de Economía.
  2. David de Meza & Mariano Selvaggi, 2004. "Exclusive Contracts Foster Relationship-Specific Investment," The Centre for Market and Public Organisation 04/105, Department of Economics, University of Bristol, UK.
  3. Matthew Ellman, 2004. "Specificity Revisited: The Role of Cross-Investments," Working Papers 150, Barcelona Graduate School of Economics.

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