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Please Hold me Up: Why Firms Grant Exclusive Dealing Contracts

  • David de Meza
  • Marianno Selvaggi

    ()

Why do irreplaceable firms with a choice of suppliers or customers deliberately expose themselves to the threat of hold up by contracting ex ante to deal with only one of them? Our explanation revolves around the multiple equilibria intrinsic to situations of unverifiable investment and many traders. Exclusive dealing eliminates inefficient equilibria in which too many firms invest too little. The enhanced ex post bargaining power of the chosen firm is beneficial for incentives whilst the distributional impact is more than offset in the ex ante negotiations over which this firm obtains the access privilege.

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File URL: http://www.bris.ac.uk/Depts/CMPO/workingpapers/wp66.pdf
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Paper provided by Department of Economics, University of Bristol, UK in its series The Centre for Market and Public Organisation with number 03/066.

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Length: 30 pages
Date of creation: Apr 2003
Date of revision:
Handle: RePEc:bri:cmpowp:03/066
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Web page: http://www.bris.ac.uk/cmpo/
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  2. Ariel Rubinstein, 2010. "Perfect Equilibrium in a Bargaining Model," Levine's Working Paper Archive 252, David K. Levine.
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