Contracts as a Barrier to Entry in Markets with Nonpivotal Buyers†

Contracts as a Barrier to Entry in Markets with Nonpivotal Buyers† AbstractConsidering 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. (JEL D11, D21, D43, D86, L13, L51) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Review American Economic Association

Contracts as a Barrier to Entry in Markets with Nonpivotal Buyers†

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Publisher
American Economic Association
Copyright
Copyright © 2017 © American Economic Association
ISSN
0002-8282
D.O.I.
10.1257/aer.20151710
Publisher site
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Abstract

AbstractConsidering 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. (JEL D11, D21, D43, D86, L13, L51)

Journal

American Economic ReviewAmerican Economic Association

Published: Jul 1, 2017

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