Working Paper: NBER ID: w14115
Authors: Claudia M. Landeo; Kathryn E. Spier
Abstract: This paper reports the results of an experiment designed to assess the ability of an incumbent seller to profitably foreclose a market with exclusive contracts. We use the strategic environment described by Rasmusen, Ramseyer, and Wiley (1991) and Segal and Whinston (2000) where entry is unprofitable when sufficiently many downstream buyers sign exclusive contracts with the incumbent. When discrimination is impossible, the game resembles a stag-hunt (coordination) game in which the buyers' payoffs are endogenously chosen by the incumbent seller. Exclusion occurs when the buyers fail to coordinate on their preferred equilibrium. Two-way non-binding pre-play communication among the buyers lowers the power of exclusive contracts and induces more generous contract terms from the seller. When discrimination and communication are possible, the exclusion rate rises. Divide-and-conquer strategies are observed more frequently when buyers can communicate with each other. Exclusion rates are significantly higher when the buyers' payoffs are endogenously chosen rather than exogenously given. Finally, secret offers are shown to decrease the incumbent's power to profitably exclude.
Keywords: No keywords provided
JEL Codes: C72; C90; K21; K41; L12; L40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| buyer coordination (L14) | market exclusion (D49) |
| communication (L96) | buyer coordination (L14) |
| communication (L96) | power of exclusive contracts (L14) |
| contract exclusivity (L14) | buyer outcomes (G51) |
| communication (L96) | exclusion rates (J15) |
| payoff structure (G32) | seller's ability to exclude (D44) |
| secret offers (Y60) | power of incumbent to exclude (H13) |