IDEAS home Printed from https://ideas.repec.org/a/eee/indorg/v59y2018icp514-537.html
   My bibliography  Save this article

Long-term contracts as barriers to entry with differentiated products

Author

Listed:
  • Gavin, Sebnem
  • Ross, Thomas W.

Abstract

We study long-term contracts as barriers to entry, departing from earlier literature in three important ways. First, the incumbent firm is allowed a period of monopoly prior to the entrant’s arrival, a period that opens up greater possibilities for mutually attractive long-term contracts. Second, our model allows for product differentiation – a generalization that is shown to have significant implications for the design and profitability of long-term contacts. Finally, we consider long-term contracts that are not exclusive and show how such contracts can nevertheless contribute to the profitable partial foreclosure of entrants.

Suggested Citation

  • Gavin, Sebnem & Ross, Thomas W., 2018. "Long-term contracts as barriers to entry with differentiated products," International Journal of Industrial Organization, Elsevier, vol. 59(C), pages 514-537.
  • Handle: RePEc:eee:indorg:v:59:y:2018:i:c:p:514-537
    DOI: 10.1016/j.ijindorg.2018.05.004
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0167718718300584
    Download Restriction: Full text for ScienceDirect subscribers only

    File URL: https://libkey.io/10.1016/j.ijindorg.2018.05.004?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Chiara Fumagalli & Massimo Motta & Lars Persson, 2009. "On The Anticompetitive Effect Of Exclusive Dealing When Entry By Merger Is Possible," Journal of Industrial Economics, Wiley Blackwell, vol. 57(4), pages 785-811, December.
    2. David Spector, 2011. "Exclusive contracts and demand foreclosure," RAND Journal of Economics, RAND Corporation, vol. 42(4), pages 619-638, December.
    3. Avinash Dixit, 1979. "A Model of Duopoly Suggesting a Theory of Entry Barriers," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 20-32, Spring.
    4. Ordover, Janusz A. & Saloner, Garth, 1989. "Predation, monopolization, and antitrust," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 9, pages 537-596, Elsevier.
    5. Chiara Fumagalli & Massimo Motta, 2006. "Exclusive Dealing and Entry, when Buyers Compete," American Economic Review, American Economic Association, vol. 96(3), pages 785-795, June.
    6. Claudia M. Landeo & Kathryn E. Spier, 2009. "Naked Exclusion: An Experimental Study of Contracts with Externalities," American Economic Review, American Economic Association, vol. 99(5), pages 1850-1877, December.
    7. Whinston, Michael D, 1990. "Tying, Foreclosure, and Exclusion," American Economic Review, American Economic Association, vol. 80(4), pages 837-859, September.
    8. Abito, Jose Miguel & Wright, Julian, 2008. "Exclusive dealing with imperfect downstream competition," International Journal of Industrial Organization, Elsevier, vol. 26(1), pages 227-246, January.
    9. John Simpson & Abraham L. Wickelgren, 2007. "Naked Exclusion, Efficient Breach, and Downstream Competition," American Economic Review, American Economic Association, vol. 97(4), pages 1305-1320, September.
    10. Tandon, Pankaj, 1982. "Optimal Patents with Compulsory Licensing," Journal of Political Economy, University of Chicago Press, vol. 90(3), pages 470-486, June.
    11. Greenlee, Patrick & Reitman, David & Sibley, David S., 2008. "An antitrust analysis of bundled loyalty discounts," International Journal of Industrial Organization, Elsevier, vol. 26(5), pages 1132-1152, September.
    12. Blaise Allaz & Jean-Luc Vila, 1993. "Cournot Competition, Forward Markets and Efficiency," Post-Print hal-00511806, HAL.
    13. Farrell, Joseph, 2005. "Deconstructing Chicago on Exclusive Dealing," Competition Policy Center, Working Paper Series qt9wv3k43c, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
    14. Frank Mathewson & Ralph A. Winter, 1997. "Tying as a Response to Demand Uncertainty," RAND Journal of Economics, The RAND Corporation, vol. 28(3), pages 566-583, Autumn.
    15. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716.
    16. Yong, Jong-Say, 1996. "Excluding Capacity-Constrained Entrants through Exclusive Dealing: Theory and an Application to Ocean Shipping," Journal of Industrial Economics, Wiley Blackwell, vol. 44(2), pages 115-129, June.
    17. Nirvikar Singh & Xavier Vives, 1984. "Price and Quantity Competition in a Differentiated Duopoly," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 546-554, Winter.
    18. Aghion, Philippe & Bolton, Patrick, 1987. "Contracts as a Barrier to Entry," American Economic Review, American Economic Association, vol. 77(3), pages 388-401, June.
    19. Polo, Michele & Scarpa, Carlo, 2013. "Liberalizing the gas industry: Take-or-pay contracts, retail competition and wholesale trade," International Journal of Industrial Organization, Elsevier, vol. 31(1), pages 64-82.
    20. Ilya Segal & Michael D. Whinston, 2000. "Exclusive Contracts and Protection of Investments," RAND Journal of Economics, The RAND Corporation, vol. 31(4), pages 603-633, Winter.
    21. Enrique Ide & Juan-Pablo Montero & Nicolás Figueroa, 2016. "Discounts as a Barrier to Entry," American Economic Review, American Economic Association, vol. 106(7), pages 1849-1877, July.
    22. Özlem Bedre-Defolie & Gary Biglaiser, 2017. "Contracts as a Barrier to Entry in Markets with Nonpivotal Buyers," American Economic Review, American Economic Association, vol. 107(7), pages 2041-2071, July.
    23. Michael D. Whinston & Ilya R. Segal, 2000. "Naked Exclusion: Comment," American Economic Review, American Economic Association, vol. 90(1), pages 296-309, March.
    24. Innes, Robert & Sexton, Richard J, 1994. "Strategic Buyers and Exclusionary Contracts," American Economic Review, American Economic Association, vol. 84(3), pages 566-584, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ruszel, Mariusz, 2020. "The significance of the Baltic Sea Region for natural gas supplies to the V4 countries," Energy Policy, Elsevier, vol. 146(C).
    2. Dawen Meng & Guoqiang Tian, 0. "The competitive and welfare effects of long-term contracts with network externalities and bounded rationality," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 0, pages 1-39.
    3. Dawen Meng & Guoqiang Tian, 2021. "The competitive and welfare effects of long-term contracts with network externalities and bounded rationality," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 72(1), pages 337-375, July.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kitamura, Hiroshi & Matsushima, Noriaki & Sato, Misato, 2018. "Exclusive contracts with complementary inputs," International Journal of Industrial Organization, Elsevier, vol. 56(C), pages 145-167.
    2. Jan Boone & Wieland Müller & Sigrid Suetens, 2014. "Naked Exclusion in the Lab: The Case of Sequential Contracting," Journal of Industrial Economics, Wiley Blackwell, vol. 62(1), pages 137-166, March.
    3. Jay Pil Choi & Christodoulos Stefanadis, 2018. "Sequential innovation, naked exclusion, and upfront lump-sum payments," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 65(4), pages 891-915, June.
    4. Dongyeol Lee, 2015. "The Competitive Effect of Exclusive Dealing in the Presence of Renegotiation Breakdown," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 47(1), pages 25-50, August.
    5. Dawen Meng & Guoqiang Tian, 0. "The competitive and welfare effects of long-term contracts with network externalities and bounded rationality," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 0, pages 1-39.
    6. Dawen Meng & Guoqiang Tian, 2021. "The competitive and welfare effects of long-term contracts with network externalities and bounded rationality," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 72(1), pages 337-375, July.
    7. Zhijun Chen & Greg Shaffer, 2016. "Are Market-Share Contracts a Poor Man’s Exclusive Dealing?," Monash Economics Working Papers 44-16, Monash University, Department of Economics.
    8. Fadairo, Muriel & Yu, Jianyu & Lanchimba, Cintya, 2017. "The Choice of Exclusive Dealing: Economic Rationales and Evidence from French Retail Chains," Journal of Retailing, Elsevier, vol. 93(3), pages 317-335.
    9. Hiroshi Kitamura & Noriaki Matsushima & Misato Sato, 2018. "Naked exclusion under exclusive-offer competition," ISER Discussion Paper 1021, Institute of Social and Economic Research, Osaka University.
    10. Kitamura, Hiroshi & Matsushima, Noriaki & Sato, Misato, 2017. "Exclusive contracts and bargaining power," Economics Letters, Elsevier, vol. 151(C), pages 1-3.
    11. Mikko Packalen, 2011. "Market Share Exclusion," Working Papers 1103, University of Waterloo, Department of Economics, revised Aug 2011.
    12. DeGraba, Patrick, 2013. "Naked exclusion by a dominant input supplier: Exclusive contracting and loyalty discounts," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 516-526.
    13. Zhijun Chen & Greg Shaffer, 2014. "Naked exclusion with minimum-share requirements," RAND Journal of Economics, RAND Corporation, vol. 45(1), pages 64-91, March.
    14. Hiroshi Kitamura & Noriaki Matsushima & Misato Sato, 2021. "Defending home against giants: Exclusive dealing as a survival strategy for local firms," ISER Discussion Paper 1122, Institute of Social and Economic Research, Osaka University.
    15. Kaplow, Louis & Shapiro, Carl, 2007. "Antitrust," Handbook of Law and Economics, in: A. Mitchell Polinsky & Steven Shavell (ed.), Handbook of Law and Economics, edition 1, volume 2, chapter 15, pages 1073-1225, Elsevier.
    16. Smith, Angela M., 2011. "An experimental study of exclusive contracts," International Journal of Industrial Organization, Elsevier, vol. 29(1), pages 4-13, January.
    17. Cédric Argenton, 2010. "Exclusive Quality," Journal of Industrial Economics, Wiley Blackwell, vol. 58(3), pages 690-716, September.
    18. Gratz, Linda & Reisinger, Markus, 2013. "On the competition enhancing effects of exclusive dealing contracts," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 429-437.
    19. Elhauge, Einer & Wickelgren, Abraham L., 2015. "Robust exclusion and market division through loyalty discounts," International Journal of Industrial Organization, Elsevier, vol. 43(C), pages 111-121.
    20. Enrique Ide & Juan-Pablo Montero & Nicolás Figueroa, 2016. "Discounts as a Barrier to Entry," American Economic Review, American Economic Association, vol. 106(7), pages 1849-1877, July.

    More about this item

    Keywords

    Long-term contracts; Barriers to entry; Differentiated products;
    All these keywords.

    JEL classification:

    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:indorg:v:59:y:2018:i:c:p:514-537. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: http://www.elsevier.com/locate/inca/505551 .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505551 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.