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Exclusive Contracts Foster Relationship-Specific Investment

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  • David de Meza
  • Mariano Selvaggi

    ()

Abstract

Exclusive contracts prohibit one or both parties from trading with anyone else. Contrary to earlier findings, notably Segal and Whinston (2000), we show that investments that are specific to the contracted parties may be encouraged. Results depend on the nature of the investments and whether the bargaining is cooperative or non-cooperative. The major part of the analysis show that exclusive contracts designed to 'assure' the supply of essential inputs promote investment. Infinite penalties for breach, even if ex post renegotiable, may result in excessive investment, in which case a finite penalty for breach achieves the first-best outcome.

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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 04/105.

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Length: 35 pages
Date of creation: Jun 2004
Date of revision:
Handle: RePEc:bri:cmpowp:04/105

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Related research

Keywords: exclusive dealing; non-cooperative bargaining; liquidated damages; renegotiation; resale;

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References

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Citations

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Cited by:
  1. Selvaggi, Marianao & Vasconcelos, Luis, 2006. "Star Wars: Exclusive Superstars and Collusive Outcomes," FEUNL Working Paper Series wp496, Universidade Nova de Lisboa, Faculdade de Economia.
  2. Klein, Joachim & Zenger, Hans, 2009. "Predatory Exclusive Dealing," Discussion Papers in Economics 10626, University of Munich, Department of Economics.
  3. Fumagalli, Chiara & Motta, Massimo & Rønde, Thomas, 2009. "Exclusive dealing: the interaction between foreclosure and investment promotion," CEPR Discussion Papers 7240, C.E.P.R. Discussion Papers.
  4. Matthew Ellman, 2004. "Specificity Revisited: The Role of Cross-Investments," Working Papers 150, Barcelona Graduate School of Economics.
  5. Noriaki Matsushima & Ryusuke Shinohara, 2011. "What factors determine the number of trading partners?," ISER Discussion Paper 0808, Institute of Social and Economic Research, Osaka University.
  6. Vasconcelos, Luis, 2006. "Contractual signalling, relationship-specific investment and exclusive agreements," FEUNL Working Paper Series wp495, Universidade Nova de Lisboa, Faculdade de Economia.
  7. Roberto Burguet & Ramon Caminal, 2010. "Simultaneous Nash Bargaining with Consistent Beliefs," Working Papers 521, Barcelona Graduate School of Economics.

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