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Naked Exclusion: An Experimental Study of Contracts with Externalities

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  • Landeo, Claudia M.
  • Spier, Kathryn E.

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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Bibliographic Info

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

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Citations

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Cited by:
  1. Smith, Angela M., 2011. "An experimental study of exclusive contracts," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 29(1), pages 4-13, January.
  2. Boone, J. & Müller, W. & Suetens, S., 2009. "Naked Exclusion: Towards a Behavioral Approach to Exclusive Dealing," Discussion Paper, Tilburg University, Center for Economic Research 2009-30, Tilburg University, Center for Economic Research.
  3. Guttel, Ehud & Leshem, Shmuel, 2013. "Bargaining around cost–benefit standards," Journal of Public Economics, Elsevier, Elsevier, vol. 103(C), pages 55-67.
  4. Hiroshi Kitamura & Misato Sato & Koki Arai, 2014. "Exclusive contracts when the incumbent can establish a direct retailer," Journal of Economics, Springer, Springer, vol. 112(1), pages 47-60, May.
  5. Hinloopen, Jeroen & Müller, Wieland & Normann, Hans-Theo, 2013. "Output commitment through product bundling: Experimental evidence," DICE Discussion Papers 116, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  6. Hiroshi Kitamura & Noriaki Matsushima & Misato Sato, 2013. "How Does Downstream Firms' Efficiency Affect Exclusive Supply Agreements?," ISER Discussion Paper, Institute of Social and Economic Research, Osaka University 0878, Institute of Social and Economic Research, Osaka University.
  7. Jan Boone & Wieland Müller & Sigrid Suetens, 2011. "Naked exclusion in the lab: The case of sequential contracting," Vienna Economics Papers, University of Vienna, Department of Economics 1109, University of Vienna, Department of Economics.
  8. J. Mark Ramseyer & Eric Rasmusen, 2013. "Exclusive Dealing: Before Bork, and Beyond," Working Papers, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy 2013-11, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  9. Landeo, Claudia & Spier, Kathryn, 2012. "It Takes Three to Tango: An Experimental Study of Contracts with Stipulated Damages," Working Papers 2012-14, University of Alberta, Department of Economics.

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