Exclusion as Inefficient Insurance

Cédric Argenton and Bert Willems

No 2009-015, Discussion Paper from Tilburg University, Tilburg Law and Economic Center

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. Keywords: exclusivity, contracts, monopolization, risk-aversion, risk-sharing, damages JEL Classifications: D43, D86, K21, L12, L42

Date: 2009

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:dgr:kubtil:2009015

Access Statistics for this paper

More papers in Discussion Paper from Tilburg University, Tilburg Law and Economic Center
Series data maintained by Corry Stuyts ().