Exclusion as Inefficient Insurance

CentER Discussion Paper Series No. 2009-24

TILEC Discussion Paper No. 2009-015

30 Pages Posted: 20 Apr 2009 Last revised: 24 Jun 2013

See all articles by Cédric Argenton

Cédric Argenton

Tilburg University - Tilburg University School of Economics and Management; Tilburg Law and Economics Center (TILEC)

Bert Willems

Tilburg University - Department of Economics - CentER & TILEC; University of Toulouse 1 - Toulouse School of Economics (TSE)

Date Written: April 15, 2009

Abstract

It is well established that an incumbent firm may use exclusivity contracts so as to monopolize an industry or deter entry. Such an anticompetitive practice could be tolerated if it were associated with sufficiently large efficiency gains, e.g. insuring buyers against price volatility. In this paper we study the trade-off between positive effects (risk sharing) and negative effects (exclusion) of exclusivity contracts. We revisit the seminal model of Aghion and Bolton (1987) under risk-aversion and show that although exclusivity contracts induce optimal risk-sharing, they can be used not only to deter the entry of a more efficient rival on the product market but also to crowd out financial investors willing to insure the buyer at competitive rates. We further show that in a world without financial investors, purely financial bilateral instruments, such as forward contracts, achieve optimal risk sharing without distorting product market outcomes. Thus, there is no room for an insurance defense of exclusivity contracts.

Keywords: exclusivity, contracts, monopolization, risk-aversion, risk-sharing, damages

JEL Classification: D43, D86, K21, L12, L42

Suggested Citation

Argenton, Cédric and Argenton, Cédric and Willems, Bert, Exclusion as Inefficient Insurance (April 15, 2009). CentER Discussion Paper Series No. 2009-24, TILEC Discussion Paper No. 2009-015, Available at SSRN: https://ssrn.com/abstract=1382806 or http://dx.doi.org/10.2139/ssrn.1382806

Cédric Argenton (Contact Author)

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Tilburg Law and Economics Center (TILEC) ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

Bert Willems

Tilburg University - Department of Economics - CentER & TILEC ( email )

P.O. Box 90153 Room K308
Tilburg, 5000LE
Netherlands
+31134662588 (Phone)

HOME PAGE: http://www.bertwillems.com

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
296
Abstract Views
3,577
rank
131,668
PlumX Metrics