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  4. July 2017
  5. Contracts as a Barrier to Entry in Markets with Nonpivotal Buyers

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Contracts as a Barrier to Entry in Markets with Nonpivotal Buyers

  • Özlem Bedre-Defolie
  • Gary Biglaiser
American Economic Review
vol. 107, no. 7, July 2017
(pp. 2041–71)
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Abstract

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.

Citation

Bedre-Defolie, Özlem, and Gary Biglaiser. 2017. "Contracts as a Barrier to Entry in Markets with Nonpivotal Buyers." American Economic Review, 107 (7): 2041–71. DOI: 10.1257/aer.20151710

Additional Materials

JEL Classification

  • D11 Consumer Economics: Theory
  • D21 Firm Behavior: Theory
  • D43 Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection
  • D86 Economics of Contract: Theory
  • L13 Oligopoly and Other Imperfect Markets
  • L51 Economics of Regulation