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Long Term Contracts, Arbitrage, and Vertical Restraints

Author

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  • Ellingsen, Tore

    (Dept. of Economics, Stockholm School of Economics)

Abstract

The paper argues that sellers sometimes impose exclusivity clauses on their buyers in order to prevent arbitrage between brands. In a duopoly model in which the sellers compete through fairly general long term contracts, it is shown that common agency is always allowed whenever reselling can be controlled directly, but that exclusive dealing is imposed otherwise. The model also offers a new rationale for ex post inefficient penalties for breach of contract. Equilibrium long term contracts are shown to reduce sellers'profits and to increase the buyers'surplus relative to the spot market level. exclusive dealing lowers overall welfare in this model. As an illustraiton, the theory is applied to the case of British brewers.

Suggested Citation

  • Ellingsen, Tore, 1995. "Long Term Contracts, Arbitrage, and Vertical Restraints," SSE/EFI Working Paper Series in Economics and Finance 58, Stockholm School of Economics.
    • Handle: RePEc:hhs:hastef:0058
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    References listed on IDEAS

    as
    1. B. Douglas Bernheim & Michael D. Whinston, 1998. "Exclusive Dealing," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 64-103, February.
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    More about this item

    Keywords

    Vertical restraints; exclusive dealing; requirements contracts; breach;
    All these keywords.

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L4 - Industrial Organization - - Antitrust Issues and Policies

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