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Exclusionary Contracts

Exclusionary Contracts. Graduate Industrial Organiztion 2014. Central Question. When will buyers and a seller enter contracts that deter entry? Examples: exclusivity contracts l ong term contracts Synthesize, extend theory and apply to:

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Exclusionary Contracts

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  1. Exclusionary Contracts Graduate Industrial Organiztion 2014

  2. Central Question When will buyers and a seller enter contracts that deter entry? Examples: • exclusivity contracts • long term contracts Synthesize, extend theory and apply to: Director of Investigation and Research v. D&B Companies of Canada Ltd., CT-1994-01 (Canada) “Nielsen”

  3. History of thought Traditional View : Monopolist has power to impose exclusionary contracts to detriment of consumers. • E.g. expert in Canadian case: Laidlaw (1991): “if one contracting party is a monopolist … it can preserve its market power by insisting that its customers (or suppliers) sign long-term contracts …..” The (early) Chicago School Response :Two propositions: • Contracts are not “imposed”. Contracts must maximize combined wealth of contracting parties. • Therefore, contracts are efficient.

  4. Theme Voluntary contracts can be anticompetitive when they impose externalities on parties outside the contract.(Aghion-Bolton AER 1987 and post-Chicago literature) Applicable theory depends on “victim” of externality: Downstream contracts: • Entrant • Other buyers • Upstream supplier Upstream contracts: • Downstream buyers

  5. General Structure Input suppliers incumbent entrants buyers • Entrant(s) have uncertain costs, and will enter if costs low enough • (a supply curve, elasticity η ) • Incumbent can strike an ex ante contract with buyers or input suppliers • (p,d) e.g. (10,3) d = stipulated damages • Incumbent unit cost: cIbuyer’s unit value: v

  6. DOWNSTREAM CONTRACTS

  7. Downstream Contracts • we want: • a “Chicago benchmark” with no incentive for exclusion • the simplest departures from the benchmark to capture each of three incentive channels • But what does “exclusionary” mean in our setting? • contract (p, d) e.g., (10,3) • equivalent: pay 3 up front, and 7 if decide to buy: an option • change notation: option: (po, x) • efficient contract: x = cI • exclusionary contract: x < cI • If realized • then entrant is more efficient, but is excluded

  8. Downstream contracts suppliers incumbent Entrant, random c buyers

  9. Why would optimal x < cI ? suppliers incumbent Entrant, random c buyers

  10. Why would optimal x < cI ? suppliers incumbent Entrant, random c buyers

  11. Why would optimal x < cI ? suppliers incumbent Entrant, random c buyers

  12. Case:Nielsen Raw data Suppliers: grocery chains Information + software N E Buyers: grocery manufacturers Issue: contracts signed in 1986 with upstream suppliers and downstream buyers, when E appeared • downstream: tripled term of selected contracts, with damages

  13. UPSTREAM CONTRACTS

  14. Raw data Suppliers: grocery chains Information N E Buyers: grocery manufacturers • basic upstream foreclosure theory • Nielsen’s upstream contracts: exclusive, 5- year contracts

  15. Key: Nielsen and IRI were in “simultaneous” negotiations with input suppliers • outcome: Nielsen won the bidding for all inputs, result: monopoly. • Questions for theory: • Why? • Outcome in general of bidding for rights to upstream inputs? When does it → exclusion? Bidding for exclusive rights for all inputs won by one firm

  16. Model: upstream contracts n suppliers N E Bidding Game: • N and E (i = 1,2) submit bids • each supplier j chooses max • determines allocation • payoffs

  17. UPSTREAM CONTRACTS • define (artificial “semi-cooperative game” “efficiency”) Proposition: Whenever then either is the only possible equilibrium for the bidding game. • proof: if strategies give rise to some other allocation … at least one player gains from outbidding • why non-existence? • e.g.: n = 10 ; maybe:

  18. UPSTREAM CONTRACTS • Beyond this, characterization requires more structure on payoffs, i.e. on competition given allocation. • Consider buyer preferences: • Complementarity upstream of raw inputs, as embedded in final product • Inherent substitutability downstream • characterize , equilibrium in “space” of these two variables • If two features are strong enough… monopoly

  19. Summary: Why did exclusionary contracts emerge in Nielsen? 1.Upstream contracts: IRI and Nielsen competed for exclusive rights (summer of 1986) Outcome… Explanation: monopoly outcome inevitable due to: i. close inherent substitutes downstream ii. complements upstream iii. … • Intense competition “for monopoly position” 2. Downstream long term contracts • 3 Channels for incentives to exclude via contracts • Targeted particular subset of buyers for these contracts…

  20. Additional aspects of Nielsen Other strategies adopted: • Renegotiation and Staggering of upstream contracts • MFN’s in upstream contracts • Competition for upstream rights was not simultaneous Policy Issues: • Nielsen’s argument in defense • The decision and impact: entry? • Tribunal foresaw this possibility

  21. EXTRA SLIDES

  22. Downstream Differentiation t Implementable via bidding game nonexistence Nielsen * Upstream complementarity

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