Vertical Exclusion with Endogenous Competiton Externalities

43 Pages Posted: 28 Sep 2012

See all articles by Stephen Hansen

Stephen Hansen

University of Oxford - Department of Economics

Massimo Motta

Universitat Pompeu Fabra

Date Written: May 2012

Abstract

In a vertical market in which downstream firms have private information about their productivity and compete for consumers, an upstream firm posts public bilateral contracts. When downstream firms are risk-neutral without wealth constraints, the upstream firm offers the input to all retailers. When they are sufficiently risk averse it sells to one, thereby eliminating externalities among downstream firms that necessitate the payment of risk premia. By similar reasoning exclusion is also optimal with downstream wealth constraints. Thus exclusion arises when contracts are fully observable and downstream firms are ex ante symmetric. The result is robust to a number of extensions.

Keywords: Adverse selection, Exclusive contracts, Limited liability, Risk

JEL Classification: D82, L22, L42

Suggested Citation

Hansen, Stephen and Motta, Massimo, Vertical Exclusion with Endogenous Competiton Externalities (May 2012). CEPR Discussion Paper No. DP8982, Available at SSRN: https://ssrn.com/abstract=2153414

Stephen Hansen

University of Oxford - Department of Economics ( email )

10 Manor Rd
Oxford, Oxfordshire OX1 3UQ
United Kingdom

Massimo Motta

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain

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