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Exclusive Contracts Foster Relationship-Specific Investment

Author

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  • David de Meza
  • Mariano Selvaggi

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Abstract

Exclusive contracts prohibit one or both parties from trading with anyone else. Contrary to earlier findings, notably Segal and Whinston (2000), we show that investments that are specific to the contracted parties may be encouraged. Results depend on the nature of the investments and whether the bargaining is cooperative or non-cooperative. The major part of the analysis show that exclusive contracts designed to 'assure' the supply of essential inputs promote investment. Infinite penalties for breach, even if ex post renegotiable, may result in excessive investment, in which case a finite penalty for breach achieves the first-best outcome.

Suggested Citation

  • 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.
  • Handle: RePEc:bri:cmpowp:04/105
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    File URL: http://www.bris.ac.uk/Depts/CMPO/workingpapers/wp105.pdf
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    References listed on IDEAS

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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. repec:dpr:wpaper:0878 is not listed on IDEAS
    3. Niko Matouschek & Paolo Ramezzana, 2007. "THE ROLE OF EXCLUSIVE CONTRACTS IN FACILITATING MARKET TRANSACTIONS -super-," Journal of Industrial Economics, Wiley Blackwell, vol. 55(2), pages 347-371, June.
    4. Matsushima, Noriaki & Shinohara, Ryusuke, 2014. "What factors determine the number of trading partners?," Journal of Economic Behavior & Organization, Elsevier, vol. 106(C), pages 428-441.
    5. Roberto Burguet & Ramon Caminal, 2010. "Simultaneous Nash Bargaining with Consistent Beliefs," UFAE and IAE Working Papers 854.10, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
    6. Chiara Fumagalli & Massimo Motta & Thomas Rønde, 2009. "Exclusive Dealing: The Interaction between Foreclosure and Investment Promotion," Working Papers 2009.120, Fondazione Eni Enrico Mattei.
    7. Klein, Joachim & Zenger, Hans, 2009. "Predatory Exclusive Dealing," Discussion Papers in Economics 10626, University of Munich, Department of Economics.
    8. Vasconcelos, Luís, 2014. "Contractual signaling, relationship-specific investment and exclusive agreements," Games and Economic Behavior, Elsevier, vol. 87(C), pages 19-33.
    9. Selvaggi, Marianao & Vasconcelos, Luis, 2006. "Star Wars: Exclusive Superstars and Collusive Outcomes," FEUNL Working Paper Series wp496, Universidade Nova de Lisboa, Faculdade de Economia.
    10. David Meza & Mariano Selvaggi, 2007. "Exclusive contracts foster relationship-specific investment," RAND Journal of Economics, RAND Corporation, vol. 38(1), pages 85-97, March.
    11. Lluis Bru & Daniel Cardona, 2016. "Strategic Sourcing in Procurement," DEA Working Papers 82, Universitat de les Illes Balears, Departament d'Economía Aplicada.

    More about this item

    Keywords

    exclusive dealing; non-cooperative bargaining; liquidated damages; renegotiation; resale;

    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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