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Managing Strategically Outside Options under Incomplete Contracts

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  • Antonio Nicita

Abstract

This paper studies an incomplete contract framework in which specific investments affect parties’ outside options. We show that the ‘direction’ of standard hold-up in this new framework strictly depends on the impact generated by investments on ex-post parties’ outside options. This conclusion reverses some of the main results raised by the standard literature on incomplete contracts. Under given conditions, parties may even over-invest in assets specificity, as the changes induced in outside options improve their ex-post bargaining power. We discuss the implications for competition policy and for the management of incomplete contracts. Copyright Springer Science+Business Media New York 2013

Suggested Citation

  • Antonio Nicita, 2013. "Managing Strategically Outside Options under Incomplete Contracts," Journal of Industry, Competition and Trade, Springer, vol. 13(3), pages 361-374, September.
    • Handle: RePEc:kap:jincot:v:13:y:2013:i:3:p:361-374
    DOI: 10.1007/s10842-012-0129-6
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    References listed on IDEAS

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    1. Antonio Nicita & Massimiliano Vatiero, 2014. "Dixit versus Williamson: the ‘fundamental transformation’ reconsidered," European Journal of Law and Economics, Springer, vol. 37(3), pages 439-453, June.
    2. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-1158, December.
    3. Castaldo Angelo & Nicita Antonio, 2007. "Essential Facility Access in Europe: Building a Test for Antitrust Policy," Review of Law & Economics, De Gruyter, vol. 3(1), pages 83-110, April.
    4. Shingo Ishiguro, 2010. "Holdup, search, and inefficiency," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 44(2), pages 307-338, August.
    5. Ken Binmore & Avner Shared & John Sutton, 1989. "An Outside Option Experiment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 104(4), pages 753-770.
    6. MacLeod, W Bentley & Malcomson, James M, 1993. "Investments, Holdup, and the Form of Market Contracts," American Economic Review, American Economic Association, vol. 83(4), pages 811-837, September.
    7. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
    8. Antonio Nicita & Giovanni Ramello, 2005. "Exclusivity and Antitrust in Media Markets: The Case of Pay-TV in Europe," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 12(3), pages 371-387.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    incomplete contracts; hold-up problem; strategic behavior; endogenous outside options; cross competition; vertical integration; D23; L12; L14; L21; L22; L42;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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