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Vertical Exclusion with Endogenous Competiton Externalities

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  • Hansen, Stephen
  • Motta, Massimo

Abstract

In a vertical market in which downstream firms have private information about their productivity and compete for consumers, an upstream firm posts public bilateral contracts. When downstream firms are risk-neutral without wealth constraints, the upstream firm offers the input to all retailers. When they are sufficiently risk averse it sells to one, thereby eliminating externalities among downstream firms that necessitate the payment of risk premia. By similar reasoning exclusion is also optimal with downstream wealth constraints. Thus exclusion arises when contracts are fully observable and downstream firms are ex ante symmetric. The result is robust to a number of extensions.

Suggested Citation

  • Hansen, Stephen & Motta, Massimo, 2012. "Vertical Exclusion with Endogenous Competiton Externalities," CEPR Discussion Papers 8982, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:8982
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    References listed on IDEAS

    as
    1. Blair,Roger D. & Lafontaine,Francine, 2011. "The Economics of Franchising," Cambridge Books, Cambridge University Press, number 9780521775892.
    2. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
    3. Francine Lafontaine & Kathryn L. Shaw, 1999. "The Dynamics of Franchise Contracting: Evidence from Panel Data," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 1041-1080, October.
    4. Sundaram,Rangarajan K., 1996. "A First Course in Optimization Theory," Cambridge Books, Cambridge University Press, number 9780521497701.
    5. Laffont, Jean-Jacques & Tirole, Jean, 1987. "Auctioning Incentive Contracts," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 921-937, October.
    6. Sundaram,Rangarajan K., 1996. "A First Course in Optimization Theory," Cambridge Books, Cambridge University Press, number 9780521497190.
    7. Riordan, Michael H & Sappington, David E M, 1987. "Awarding Monopoly Franchises," American Economic Review, American Economic Association, vol. 77(3), pages 375-387, June.
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    Cited by:

    1. Vianney Dequiedt & David Martimort, 2015. "Vertical Contracting with Informational Opportunism," American Economic Review, American Economic Association, vol. 105(7), pages 2141-2182, July.
    2. Markus Reisinger & Emanuele Tarantino, 2015. "Vertical integration, foreclosure, and productive efficiency," RAND Journal of Economics, RAND Corporation, vol. 46(3), pages 461-479, September.
    3. Yu Chen, 2017. "Simplification of Contracting under Adverse Selection with Ex Post State," Graz Economics Papers 2017-01, University of Graz, Department of Economics.
    4. Lømo, Teis Lunde, 2015. "Risk sharing mitigates opportunism in vertical contracting," Working Papers in Economics 10/15, University of Bergen, Department of Economics.

    More about this item

    Keywords

    Adverse selection; Exclusive contracts; Limited liability; Risk;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • 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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