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Contracts as a barrier to entry in markets with non-pivotal buyers

Author

Listed:
  • Özlem Bedre-Defolie

    (ESMT European School of Management and Technology)

  • Gary Biglaiser

    (University of North Carolina)

Abstract

Considering markets with non-pivotal buyers we analyze the anti-competitive effects of breakup fees used by an incumbent facing a more efficient entrant in the future. Buyers differ in their intrinsic switching costs. Breakup fees are profitably used to foreclose entry, regardless of the entrant’s efficiency advantage or level of switching costs. Banning breakup fees is beneficial to consumers and enhances the total welfare unless the entrant’s efficiency is close to the incumbent’s. Inefficient foreclosure arises not because of rent shifting from the entrant, but because the incumbent uses the long-term contract to manipulate consumers’ expected surplus from not signing it.

Suggested Citation

  • Özlem Bedre-Defolie & Gary Biglaiser, 2015. "Contracts as a barrier to entry in markets with non-pivotal buyers," ESMT Research Working Papers ESMT-15-02, ESMT European School of Management and Technology, revised 12 Dec 2016.
    • Handle: RePEc:esm:wpaper:esmt-15-02
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    References listed on IDEAS

    as
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