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Threat of Exit as a Source of Bargaining Power

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  • Fabian Bergès

    (Toulouse School of Economics (GREMAQ-UMR))

  • Claire Chambolle

    (INRA and Ecole Polytechnique)

Abstract

This article analyzes a simple two period model where two homogenous manufacturers compete to supply a monopolist retailer. We show that if manufacturers are vulnerable (i.e if they are likely to exit the market in case of insufficient orders in the first period) they may exploit their threat of exit to capture the whole first period industry profit. Indeed, the retailer will accept to pay the high price to the manufacturers in order to secure upstream competition in the second period. Results are robust under different market structures or contract types.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (REL - Recherches Economiques de Louvain) with number 2009033.

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Length: 15
Date of creation: 01 Sep 2009
Date of revision:
Handle: RePEc:ctl:louvre:2009033

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Keywords: Bargaining power; market entry; vertical contract;

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  1. Inderst, Roman & Wey, Christian, 2007. "Buyer power and supplier incentives," European Economic Review, Elsevier, vol. 51(3), pages 647-667, April.
  2. Dobson, Paul W & Waterson, Michael, 1997. "Countervailing Power and Consumer Prices," Economic Journal, Royal Economic Society, vol. 107(441), pages 418-30, March.
  3. Marie-Laure Allain, 2002. "The Balance of Power between Producers and Retailers ; a Differentiation model," Recherches économiques de Louvain, De Boeck Université, vol. 68(3), pages 359-370.
  4. Biglaiser, Gary & Vettas, Nikolaos, 2004. "Dynamic Price Competition with Capacity Constraints and Strategic Buyers," CEPR Discussion Papers 4315, C.E.P.R. Discussion Papers.
  5. Bolton, Patrick & Scharfstein, David S, 1990. "A Theory of Predation Based on Agency Problems in Financial Contracting," American Economic Review, American Economic Association, vol. 80(1), pages 93-106, March.
  6. Bengt Holmstrom & Jean Tirole, 1994. "Financial Intermediation, Loanable Funds and the Real Sector," Working papers 95-1, Massachusetts Institute of Technology (MIT), Department of Economics.
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