Discussion Paper Details

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Title: Vertical Exclusion with Endogenous Competiton Externalities

Author(s): Stephen Hansen and Massimo Motta

Publication Date: May 2012

Keyword(s): Adverse selection, Exclusive contracts, Limited liability and Risk

Programme Area(s): Industrial Organization

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.

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Bibliographic Reference

Hansen, S and Motta, M. 2012. 'Vertical Exclusion with Endogenous Competiton Externalities'. London, Centre for Economic Policy Research.