Exclusionary contracts and incentives to innovate

Simen Ulsaker

No 5/2020, Discussion Paper Series in Economics from Norwegian School of Economics, Department of Economics

Abstract: The article considers a situation where several firms have the opportunity to sell an identical product to a set of buyers, and where each seller can invest in R&D to develop a higher quality version of the product in question. I consider the possibility of allowing the sellers to offer exclusionary contracts, prior to deciding how much to invest in R&D. In equilibrium every buyer will sign an exclusionary contract with the same seller. Since all buyers are locked to one seller, only this seller will have an incentive to invest in R&D. Whether or not banning exclusionary contracts increases the aggregate probability of successful innovation depends on the R&D technology. More specifically, banning exclusionary contracts will increase the aggregate probability of innovation and joint surplus of buyers and sellers only when the R&D technology exhibits sufficient diseconomies of scale.

Keywords: Vertical relations; Exclusive contracts; Innovation (search for similar items in EconPapers)
JEL-codes: L22 L42 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2020-04-27
New Economics Papers: this item is included in nep-com, nep-cta, nep-gen, nep-ind, nep-ino and nep-mic
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