Contracts as a Barrier to Entry in Markets with Non-Pivotal Buyers

40 Pages Posted: 25 Jul 2015 Last revised: 16 Dec 2016

See all articles by Özlem Bedre-Defolie

Özlem Bedre-Defolie

ESMT European School of Management and Technology; University of Bergen, Economics Department; CEPR IO

Gary Biglaiser

University of North Carolina

Date Written: December 12, 2016

Abstract

Considering markets with non-pivotal buyers we analyze the anti-competitive effects of breakup fees used by an incumbent facing a more efficient entrant in the future. Buyers differ in their intrinsic switching costs. Breakup fees are profitably used to foreclose entry, regardless of the entrant’s efficiency advantage or level of switching costs. Banning breakup fees is beneficial to consumers and enhances the total welfare unless the entrant’s efficiency is close to the incumbent’s. Inefficient foreclosure arises not because of rent shifting from the entrant, but because the incumbent uses the long-term contract to manipulate consumers’ expected surplus from not signing it.

Suggested Citation

Bedre-Defolie, Özlem and Biglaiser, Gary, Contracts as a Barrier to Entry in Markets with Non-Pivotal Buyers (December 12, 2016). ESMT Working Paper No. 15-02 (R1). Available at SSRN: https://ssrn.com/abstract=2635377 or http://dx.doi.org/10.2139/ssrn.2635377

Özlem Bedre-Defolie (Contact Author)

ESMT European School of Management and Technology ( email )

Schlossplatz 1
10117 Berlin
Germany
+49(0)30212311531 (Phone)

HOME PAGE: http://www.esmt.org

University of Bergen, Economics Department ( email )

Fosswinckelsgt. 6
N-5007 Bergen, 5007
Norway

CEPR IO ( email )

London
United Kingdom

Gary Biglaiser

University of North Carolina ( email )

Chapel Hill, NC 27599
United States
919-966-4884 (Phone)
919-966-4986 (Fax)

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