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Contract contingency in vertically related markets

Author

Listed:
  • Emanuele Bacchiega

    () (UNIBO - Alma Mater Studiorum University of Bologna)

  • Olivier Bonroy

    () (GAEL - Laboratoire d'Economie Appliquée de Grenoble - Grenoble INP - Institut polytechnique de Grenoble - Grenoble Institute of Technology - INRA - Institut National de la Recherche Agronomique - CNRS - Centre National de la Recherche Scientifique - UGA - Université Grenoble Alpes)

  • Emmanuel Petrakis

    (UOC - University of Crete, Department of Economics)

Abstract

Over the last years, courts are increasingly inclined to consider pre-contractual arrangements as binding contracts, endowing them with commitment value that can be used strategically by the party that proposes them. We study the optimal pre-contractual arrangement offers of an upstream monopolist producing an essential input that may sell to two vertically differentiated downstream firms. These arrangements concern the exclusivity and the contingency of the contracts to be signed. Once the pre-contractual arrangements have been determined, the terms of the contracts are negotiated between the upstream supplier and the downstream firm(s). The distribution of bargaining power during the contract terms negotiations is the main driving force of the monopolist's choices. A powerful supplier always opts for an exclusive contract. By contrast, a weaker supplier offers non exclusive contracts and makes each of them contingent or non-contingent such as to guarantee the most favorable outside option in its negotiations.

Suggested Citation

  • Emanuele Bacchiega & Olivier Bonroy & Emmanuel Petrakis, 2018. "Contract contingency in vertically related markets," Post-Print hal-01767805, HAL.
  • Handle: RePEc:hal:journl:hal-01767805
    DOI: 10.1111/jems.12252
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-01767805
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    References listed on IDEAS

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    More about this item

    Keywords

    product differentiation; Vertical relationships; exclusive vs. non-exclusive relationships; contract contingency; two-part tariff;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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