DP4525 Exclusive Contracts, Loss to Delay and Incentives to Invest

Author(s): Christian Groh, Giancarlo Spagnolo
Publication Date: August 2004
Keyword(s): bargaining, contracting, exclusive dealing, foreclosure, incomplete contracts, investment
JEL(s): C78, D23, L20, L42
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4525

We model a new effect of exclusivity on non-contractible investments in buyer/seller relationships. By restricting the buyer to purchase from only one seller, exclusivity increases the buyer?s costs of haggling during renegotiation and hence the seller?s relative bargaining power and bargaining share. This in turn fosters the seller?s incentives to invest even for investments that are fully specific to the relationship (?internal investments?), in contrast to a recent finding by Segal and Whinston (2000b).