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Please Hold me Up: Why Firms Grant Exclusive Dealing Contracts

Author

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  • David de Meza
  • Marianno Selvaggi

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Abstract

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.

Suggested Citation

  • David de Meza & Marianno Selvaggi, 2003. "Please Hold me Up: Why Firms Grant Exclusive Dealing Contracts," The Centre for Market and Public Organisation 03/066, Department of Economics, University of Bristol, UK.
  • Handle: RePEc:bri:cmpowp:03/066
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    File URL: http://www.bris.ac.uk/Depts/CMPO/workingpapers/wp66.pdf
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    References listed on IDEAS

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    7. Freeland, Robert F, 2000. "Creating Holdup through Vertical Integration: Fisher Body Revisited," Journal of Law and Economics, University of Chicago Press, vol. 43(1), pages 33-66, April.
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    Citations

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    Cited by:

    1. Matthew Ellman, 2006. "Specificity Revisited: The Role of Cross-Investments," Journal of Law, Economics, and Organization, Oxford University Press, vol. 22(1), pages 234-257, April.
    2. David de Meza & Mariano Selvaggi, 2004. "Exclusive Contracts Foster Relationship-Specific Investment," The Centre for Market and Public Organisation 04/105, Department of Economics, University of Bristol, UK.
    3. Milliou, Chrysovalantou, 2004. "Exclusive dealing and compatibility of investments," UC3M Working papers. Economics we044919, Universidad Carlos III de Madrid. Departamento de Economía.
    4. David Meza & Mariano Selvaggi, 2007. "Exclusive contracts foster relationship-specific investment," RAND Journal of Economics, RAND Corporation, vol. 38(1), pages 85-97, March.

    More about this item

    Keywords

    exclusive dealing; hold-up; renegotiation;

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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