Exclusionary Contracts and Incentives to Innovate

Ulsaker, Simen A.

doi:10.2139/ssrn.3586414

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Exclusionary Contracts and Incentives to Innovate

NHH Dept. of Economics Discussion Paper No. 05/20

28 Pages Posted: 27 Apr 2020 Last revised: 25 Jun 2020

See all articles by Simen A. Ulsaker

Simen A. Ulsaker

NHH Norwegian School of Economics

There are 2 versions of this paper

Date Written: June 10, 2020

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

JEL Classification: L42, L22

Suggested Citation: Suggested Citation

Ulsaker, Simen A., Exclusionary Contracts and Incentives to Innovate (June 10, 2020). NHH Dept. of Economics Discussion Paper No. 05/20, Available at SSRN: https://ssrn.com/abstract=3586414 or http://dx.doi.org/10.2139/ssrn.3586414