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Contracts as a Barrier to Entry in Markets with Nonpivotal Buyers

Özlem Bedre-Defolie and Gary Biglaiser

American Economic Review, 2017, vol. 107, issue 7, 2041-71

Abstract: Considering markets with nonpivotal buyers, we analyze the anticompetitive 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. The ban 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 a long-term contract to manipulate consumers' expected surplus from not signing it.

JEL-codes: D11 D21 D43 D86 L13 L51 (search for similar items in EconPapers)
Date: 2017
Note: DOI: 10.1257/aer.20151710
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Handle: RePEc:aea:aecrev:v:107:y:2017:i:7:p:2041-71