Exclusivity as Inefficient Insurance

Cédric Argenton and Bert Willems

No 2009-24, Discussion Paper from Tilburg University, Center for Economic Research

Abstract: It is well established that an incumbent firm may use exclusivity contracts so as to monopolize an industry or deter entry. Such an anticompetitive practice could be tolerated if it were associated with sufficiently large efficiency gains, e.g. insuring buyers against price volatility. In this paper we study the trade-off between positive effects (risk sharing) and negative effects (exclusion) of exclusivity contracts. We revisit the seminal model of Aghion and Bolton (1987) under risk-aversion and show that although exclusivity contracts induce optimal risk-sharing, they can be used not only to deter the entry of a more efficient rival on the product market but also to crowd out financial investors willing to insure the buyer at competitive rates. We further show that in a world without financial investors, purely financial bilateral instruments, such as forward contracts, achieve optimal risk sharing without distorting product market outcomes. Thus, there is no room for an insurance defense of exclusivity contracts.

JEL-codes: D43 D86 K21 L12 L42 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-com, nep-ias and nep-upt
Date: 2009

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