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Naked Exclusion: An Experimental Study of Contracts with Externalities

46 Pages Posted: 28 Dec 2009  

Claudia M. Landeo

University of Alberta - Department of Economics

Kathryn E. Spier

Harvard University - Law School - Faculty; National Bureau of Economic Research (NBER)

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Date Written: September 27, 2008

Abstract

This paper reports the results of an experiment designed to assess the ability of an incumbent seller to profitably foreclose a market with exclusive contracts. We use the strategic environment described by Rasmusen, Ramseyer, and Wiley (1991) and Segal and Whinston (2000) where entry is unprofitable when sufficiently many downstream buyers sign exclusive contracts with the incumbent. When discrimination is impossible, the game resembles a stag-hunt (coordination) game in which the buyers' payoffs are endogenously chosen by the incumbent seller. Exclusion occurs when the buyers fail to coordinate on their preferred equilibrium. Two-way non-binding pre-play communication among the buyers lowers the power of exclusive contracts and induces more generous contract terms from the seller. When discrimination and communication are possible, the exclusion rate rises. Divide-and-conquer strategies are observed more frequently when buyers can communicate with each other. Exclusion rates are significantly higher when the buyers' payoffs are endogenously chosen rather than exogenously given. Finally, secret offers are shown to decrease the incumbent's power to profitably exclude.

Keywords: Bargaining with Externalities, Contracting with Externalities, Experiments, Exclusive Dealing, Antitrust, Discrimination, Endogenous Payoffs, Communication, Coordination Games, Equilibrium Selection

JEL Classification: K21, K41, C72, C90, L12, L40

Suggested Citation

Landeo, Claudia M. and Spier, Kathryn E., Naked Exclusion: An Experimental Study of Contracts with Externalities (September 27, 2008). American Economic Review, Forthcoming; Harvard Law and Economics Discussion Paper No. 604; 3rd Annual Conference on Empirical Legal Studies Papers. Available at SSRN: https://ssrn.com/abstract=1031305

Claudia M. Landeo (Contact Author)

University of Alberta - Department of Economics ( email )

Henry Marshall Tory Building 7-25
Edmonton, Alberta T6G 2H4
Canada

HOME PAGE: http://sites.google.com/a/ualberta.ca/claudia-m-landeo-s-home-page/home

Kathryn E. Spier

Harvard University - Law School - Faculty ( email )

1575 Massachusetts
Hauser 302
Cambridge, MA 02138
United States
(617) 496-0019 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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