Staggered Contracts, Market Power, and Welfare

24 Pages Posted: 25 Sep 2014

See all articles by Luis M. B. Cabral

Luis M. B. Cabral

New York University (NYU) - Leonard N. Stern School of Business - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: August 2014

Abstract

I show that exclusive, staggered supply contracts can decrease industry competition when there are economies of scale: buyers pay a higher price to the incumbent seller and the expected value received by an entrant seller is lower when contracts are staggered. Moreover, under staggered contracts there may exist equilibria where an inefficient firm forecloses a more efficient one. Given that contracts are staggered, contract length further increases market power; however, increasing contract length may also eliminate the inefficient foreclosure equilibrium. Finally, I show that, allowing firms to choose contract structure endogenously, the resulting equilibrium path features staggered contracts.

Keywords: dynamic competition, exclusion, staggered contracts

JEL Classification: L12, L41

Suggested Citation

Cabral, Luis M. B., Staggered Contracts, Market Power, and Welfare (August 2014). CEPR Discussion Paper No. DP10095. Available at SSRN: https://ssrn.com/abstract=2501568

Luis M. B. Cabral (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States
212-998-0858 (Phone)
212-998-4218 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~lcabral

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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