Exclusionary Contracts, Entry, and Communication

34 Pages Posted: 31 Jul 2007

See all articles by Heiko A. Gerlach

Heiko A. Gerlach

University of Queensland - School of Economics

Date Written: February 2007

Abstract

I examine the incentives of firms to communicate entry into an industry where the incumbent writes exclusionary, long-term contracts with consumers. The entrant's information provision affects the optimal contract proposal by the incumbent and leads to communication incentives that are highly non-linear in the size of the innovation. Entry with small and medium-to-large innovations is announced, whereas small-to-medium and large innovations are not communicated. It is demonstrated that this equilibrium communication behavior maximizes ex ante total welfare by reducing the anti-competitive impact of excessively exclusive contracts. By contrast, consumers always prefer more communication and the incumbent's equilibrium contract maximizes ex ante consumer surplus.

Keywords: Long-Term Contracts, Entry, Communication, Contractual Switching Costs, Exclusionary Conduct

JEL Classification: L41, L12, D86

Suggested Citation

Gerlach, Heiko A., Exclusionary Contracts, Entry, and Communication (February 2007). IESE Business School Working Paper No. 697, Available at SSRN: https://ssrn.com/abstract=1003367 or http://dx.doi.org/10.2139/ssrn.1003367

Heiko A. Gerlach (Contact Author)

University of Queensland - School of Economics ( email )

Brisbane, QLD 4072
Australia

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