Contracts and Competition with Large Buyers

29 Pages Posted: 10 Aug 2000

See all articles by Joshua S. Gans

Joshua S. Gans

University of Toronto - Rotman School of Management; NBER

Stephen P. King

Monash University - Department of Economics; Productivity Commission

Date Written: July 2000

Abstract

This paper reconsiders the analysis of the competitive effects of buyer contracts. In contrast to the previous literature, we do not impose ex ante asymmetry on the contracting opportunities of firms. Rather, we consider a market composed of two segments involving small anonymous and large nonanonymous buyers. While the large buyers can contract with each other and any firm in the market, it is assumed that no such opportunities exist for the small buyers. That is, neither the large buyers nor firms can make contractual commitments with small buyers. Firms must supply these buyers based on arms-length (single price oligopolistic) competition. In this environment, we demonstrate that large buyers will have an incentive to form a coalition with a single firm so as to extract rents from the small customer segment. Market dominance results. The outcome is socially suboptimal as either production takes place at a higher cost than is otherwise possible or there is a monopoly for small buyers with an associated allocative loss.

Key Words: Contracts; Competition; Efficiency; Exclusion

JEL Classification: L42

Suggested Citation

Gans, Joshua S. and King, Stephen Peter, Contracts and Competition with Large Buyers (July 2000). Available at SSRN: https://ssrn.com/abstract=235251 or http://dx.doi.org/10.2139/ssrn.235251

Joshua S. Gans (Contact Author)

University of Toronto - Rotman School of Management ( email )

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Stephen Peter King

Monash University - Department of Economics ( email )

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