Contract Contingency in Vertically Related Markets

20 Pages Posted: 29 Oct 2018

See all articles by Emanuele Bacchiega

Emanuele Bacchiega

University of Bologna - Department of Economics

Oliver Bonroy

French National Institute for Agricultural Research (INRA) - Grenoble Applied Economic Laboratory

Emmanuel Petrakis

University of Crete - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: Winter 2018

Abstract

Over the last years, courts are increasingly inclined to consider precontractual arrangements as binding contracts, endowing them with commitment value that can be used strategically by the party that proposes them. We study the optimal precontractual arrangement offers of an upstream monopolist producing an essential input that may sell to two vertically differentiated downstream firms. These arrangements concern the exclusivity and the contingency of the contracts to be signed. Once the precontractual arrangements have been determined, the terms of the contracts are negotiated between the upstream supplier and the downstream firm(s). The distribution of bargaining power during the contract terms negotiations is the main driving force of the monopolist's choices. A powerful supplier always opts for an exclusive contract. By contrast, a weaker supplier offers nonexclusive contracts and makes each of them contingent or noncontingent such as to guarantee the most favorable outside option in its negotiations.

Suggested Citation

Bacchiega, Emanuele and Bonroy, Oliver and Petrakis, Emmanuel, Contract Contingency in Vertically Related Markets (Winter 2018). Journal of Economics & Management Strategy, Vol. 27, Issue 4, pp. 772-791, 2018. Available at SSRN: https://ssrn.com/abstract=3273539 or http://dx.doi.org/10.1111/jems.12252

Emanuele Bacchiega (Contact Author)

University of Bologna - Department of Economics ( email )

Piazza Scaravilli 2
40126 Bologna, 40125
Italy
+390512098486 (Phone)
+390512098493 (Fax)

Oliver Bonroy

French National Institute for Agricultural Research (INRA) - Grenoble Applied Economic Laboratory ( email )

BP47
38040 Grenoble Cedex
France

Emmanuel Petrakis

University of Crete - Department of Economics ( email )

GR-74100 Rethymnon, GR-74100
Greece
+30 28310 77409 (Phone)
+30 28310 77406 (Fax)

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