Vertical Exclusion with Endogenous Competiton Externalities

Massimo Motta () and Stephen Hansen

No 8982, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: In a vertical market in which downstream firms have private information about their productivity and compete for consumers, an upstream firm posts public bilateral contracts. When downstream firms are risk-neutral without wealth constraints, the upstream firm offers the input to all retailers. When they are sufficiently risk averse it sells to one, thereby eliminating externalities among downstream firms that necessitate the payment of risk premia. By similar reasoning exclusion is also optimal with downstream wealth constraints. Thus exclusion arises when contracts are fully observable and downstream firms are ex ante symmetric. The result is robust to a number of extensions.

Keywords: Adverse selection; Exclusive contracts; Limited liability; Risk (search for similar items in EconPapers)
JEL-codes: D82 L22 L42 (search for similar items in EconPapers)
Date: 2012-05
New Economics Papers: this item is included in nep-bec, nep-com, nep-cta and nep-mic
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Citations: View citations in EconPapers (6)

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