Contracts as a barrier to entry in markets with non-pivotal buyers

Özlem Bedre-Defolie and Gary Biglaiser
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Özlem Bedre-Defolie: ESMT European School of Management and Technology
Gary Biglaiser: University of North Carolina

No ESMT-15-02, ESMT Research Working Papers from ESMT European School of Management and Technology

Abstract: Considering markets with non-pivotal buyers we analyze the anti-competitive effects of breakup fees used by an incumbent facing a more efficient entrant in the future. Buyers differ in their intrinsic switching costs. Breakup fees are profitably used to foreclose entry, regardless of the entrant’s efficiency advantage or level of switching costs. Banning breakup fees is beneficial to consumers and enhances the total welfare unless the entrant’s efficiency is close to the incumbent’s. Inefficient foreclosure arises not because of rent shifting from the entrant, but because the incumbent uses the long-term contract to manipulate consumers’ expected surplus from not signing it.

Pages: 38 pages
Date: 2015-07-20, Revised 2016-12-12
New Economics Papers: this item is included in nep-com, nep-cta, nep-mic and nep-reg
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http://static.esmt.org/publications/workingpapers/ESMT-15-02.pdf First version, 2015 (application/pdf)
http://static.esmt.org/publications/workingpapers/ESMT-15-02_R1.pdf Revised version, 2016 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:esm:wpaper:esmt-15-02

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