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Naked Exclusion: An Experimental Study of Contracts with Externalities

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Author Info
Landeo, Claudia M.
Spier, Kathryn E.

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Abstract

This paper reports the results of an experiment designed to assess the ability of an incumbent seller to profitably foreclose a market with exclusive contracts. We use the strategic environment described by Rasmusen, Ramseyer, and Wiley (1991) and Segal and Whinston (2000) where entry is unprofitable when sufficiently many downstream buyers sign exclusive contracts with the incumbent. When discrimination is impossible, the game resembles a stag-hunt (coordination) game in which the buyers' payoffs are endogenously chosen by the incumbent seller. Exclusion occurs when the buyers fail to coordinate on their preferred equilibrium. Two-way non-binding pre-play communication among the buyers lowers the power of exclusive contracts and induces more generous contract terms from the seller. When discrimination and communication are possible, the exclusion rate rises. Divide-and-conquer strategies are observed more frequently when buyers can communicate with each other. Exclusion rates are significantly higher when the buyers' payoffs are endogenously chosen rather than exogenously given. Finally, secret offers are shown to decrease the incumbent's power to profitably exclude.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 9143.

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Date of creation: 11 Dec 2007
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Handle: RePEc:pra:mprapa:9143

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Related research
Keywords: Bargaining with Externalities Contracting with Externalities Experiments Exclusive Dealing Antitrust Discrimination Endogenous Payoffs Communication Coordination Games Equilibrium Selection

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Find related papers by JEL classification:
D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
C9 - Mathematical and Quantitative Methods - - Design of Experiments
L0 - Industrial Organization - - General
K0 - Law and Economics - - General
K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
D4 - Microeconomics - - Market Structure and Pricing
L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
L4 - Industrial Organization - - Antitrust Issues and Policies
C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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