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Journal Article

Contracts as a barrier to entry in markets with non-pivotal buyers

American Economic Review 107 (7): 2041–2071
Özlem Bedre-Defolie, Gary Biglaiser (2017)
Subject(s)
Economics, politics and business environment
Keyword(s)
Long-term contracts, breakup fees, foreclosure
JEL Code(s)
D11, D21, D43, D86, L13, L51
Considering markets with nonpivotal buyers, we analyze the anticompetitive 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. The ban 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 a long-term contract to manipulate consumers' expected surplus from not signing it.
Copyright ©2017 by the American Economic Association.
Volume
107
Journal Pages
2041–2071