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Please Hold me Up: Why Firms Grant Exclusive Dealing Contracts

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  • David de Meza
  • Marianno Selvaggi

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, The Centre for Market and Public Organisation, 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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    Cited by:

    1. Matthew Ellman, 2006. "Specificity Revisited: The Role of Cross-Investments," The 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, The Centre for Market and Public Organisation, University of Bristol, UK.
    3. David Meza & Mariano Selvaggi, 2007. "Exclusive contracts foster relationship-specific investment," RAND Journal of Economics, RAND Corporation, vol. 38(1), pages 85-97, March.
    4. Milliou, Chrysovalantou, 2004. "Exclusive dealing and compatibility of investments," UC3M Working papers. Economics we044919, Universidad Carlos III de Madrid. Departamento de Economía.

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    More about this item

    Keywords

    exclusive dealing; hold-up; renegotiation;
    All these keywords.

    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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