spillovers investment incentives and the property rights theory of the firm this paper examines the property rights theory of the firm when a manager s relationship specific investment can be partially appropriated by the owner of an asset even if cooperation breaks down the investments of non owners may then be devalued but are seldom wholly lost to the owner with such spillovers the outside option principle can be incorporated into the grossman hart moore framework without implying that ownership demotivates enriched predictions on the determinants of integration emerge

estimating the foreclosure effect of exclusive dealing evidence from the entry of specialty beer producers this paper estimates an entry model to study the effect of exclusive dealing between anheuser busch and its distributors on rival brewers entry decisions and consumer surplus the entry model accounts for post entry demand conditions and strategic spillover effects i recover a brewer s fixed costs using a two step estimator and find spillover effects on brewers entry decisions i find that a brewer has higher fixed costs at locations where anheuser busch employ exclusive distributors but the effect is only statistically significant in certain local areas the estimates also show that a brewer is less likely to enter a location that is farther from its brewery has lower expected demand or is smaller in store size i implement counterfactual experiments to study the effect of banning exclusive contracts between anheuser busch and its distributors the results show that the welfare improvement associated with banning such contracts is very small

transfer fee regulations in european football abstract we analyze the impact of three different transfer fee systems on payoffs contract lengths training and effort incentives in european football the different regimes being used until 1995 pre bosman currently in use bosman and recently approved monti differ with respect to the transfer fee an initial club is entitled to depending on whether a player has a valid contract or not we show that the different systems differ only with respect to the contract length if the contract which maximizes the expected joint surplus of the initial club and the player is feasible under each system otherwise regime p is strictly dominated by regime b in terms of expected social welfare regime m leads to higher effort but lower incentives to invest in training compared to system b

contracts as a barrier to entry it is shown that an incumbent seller who faces a threat of entry into his or her market will sign long term contracts that prevent the entry of some lower cost producers even though they do not preclude entry completely moreover when a seller possesses superior information about the likelihood of entry it is shown that the length of the contract may act as a signal of the true probability of entry

exclusive contracts and protection of investments we consider the effect of a renegotiable exclusive contract restricting a buyer to purchase from only one seller on the levels of noncontractible investments undertaken in their relationship contrary to some informal claims in the literature we find that exclusivity has no effect when all investments are fully specific to the relationship i e are purely internal exclusivity does matter when investments affect the value of the buyer s trade with other sellers i e have external effects we examine the effects of exclusivity on investments and aggregate welfare and the private incentives of the buyer seller coalition to use it

privatization in developing countries a review of the issues abstract the theory and early experience of privatization in developing countries are reviewed privatization has been spurred by widespread dissatisfaction with the performance of public enterprises and the need to cut government expenditures unless it is accompanied by liberalization measures privatization of public enterprises is unlikely to result in significant gains in economic efficiency the sequencing of privatization and liberalization reforms will often determine their impact on efficiency but the correct order of implementation is not clear political opposition to privatization is likely to be limited to the state bureaucracy which will often be able to mobilize in order to limit the impact of reforms early implementation experiences suggest technical difficulties are as constraining as political factors

applications barriers to entry and exclusive vertical contracts in platform markets i introduction exclusive contracts in vertical relationships feature prominently in antitrust cases in network industries at issue are contracts a firm with market power signs with its suppliers or buyers that may limit access to the market by its rivals we focus on the case in which the firm signs exclusive contracts with upstream suppliers for example in the 1980s developers of games for nintendo s video game console agreed not to provide any titles for other platforms atari v nintendo 1 in u s v microsoft the dominant software provider was charged with abusing its monopoly power in its contracts with internet content providers and independent software developers with the goal of excluding competitors to microsoft s internet explorer browser 2 exclusive contracts such as these are an example of vertical restraints an area in law and economics that has generated as much controversy as any we examine the impacts of exclusionary contracts between hardware manufacturers and software providers in the home video game market an important feature of the market for video game consoles is indirect network effects katz and shapiro 1985 whereby the consumer valuation of the primary product the console or platform increases with the number of complementary goods available gaming software if platform providers enjoy indirect network effects then each may want to prevent suppliers of its complementary good from also supplying competing platforms evans 2003 regibeau 2004 when a dominant platform provider and the producers of the complementary goods sign such exclusionary contracts they burden competing platforms and potential challengers with producing the complementary goods themselves or finding alternative suppliers which may raise rivals costs and can diminish competition brennan 2007 this is the applications barrier to entry at issue in the microsoft case foreclosure of competitors can result armstrong and wright 2007 whether survival of a single dominant platform is inefficient or to the detriment of consumers depends on the size of duplicated costs among platforms the heterogeneity of consumers preferences among platforms and among the complementary goods and other factors we focus on estimating determining the causes of and exploring the implications of indirect network effects for exclusively and nonexclusively provided games exclusive titles are those games that can only be played on one system because the console producer either created the game itself or negotiated an exclusive contract with a video game maker we examine the sixth generation videogame console market which comprises nintendo s gamecube sony s playstation2 and microsoft s xbox and uncover an interesting finding although we find strong indirect network effects and a large impact of exclusivity on rivals console demand when most games are nonexclusive the marginal exclusive game contributes virtually nothing to console demand exclusivity helps a firm establish market share at first but beyond a certain point additional locking up of software supply no longer hurts rivals consequently there is no ability to capture ever more console consumers through locking in an increasing supply of exclusive games such capture of the whole market is often assumed in discussion or derived in theoretical models of the video game industry in specific or platform markets in general by itself a finding that exclusivity does not affect console demand on the margin does not necessarily imply that there is no consumer harm for with heterogeneous game quality it may be that a console maker need only lock in the best games to harm the rivals ability to compete however our investigation suggests that exclusionary contracts did not hurt consumers because of two important features of the videogame market the bargaining power enjoyed by the best software providers coupled with the existence of blockbuster games that enable competitors to establish market share prevents the foreclosure of rivals through exclusive contracting suggested by some models armstrong and wright 2007

trade quotas and buyer power with an application to the e u natural gas market we consider a market in which domestic buyers negotiate contracts with foreign sellers and explore how trade quotas can help to increase the buyers countervailing power we use the shapley value to describe bargaining power and the distribution of the trade surplus in such a bilateral oligopoly by exploiting strategic externalities among the buyers bilateral trade quotas can improve the buyers bargaining positions in contrast aggregate trade restrictions on all buyers trade never improve buyer surplus minimum quotas on imports from fringe suppliers can benefit nonaffected buyers as these enjoy positive externalities we apply these insights to the e u market for natural gas and show that the effects of trade quotas on e u gas importers power can be significant

investments holdup and the form of market contracts the authors analyze incomplete contracts to induce efficient investment with exogenous switching costs fixed price contracts are efficient generate some rigidity in prices are renegotiated intermittently by possibly small amounts and when inflation is positive generate asymmetric responses to shocks all consistent with evidence on prices and wages with two sided specific investments efficiency requires prices to have sufficient escalator clauses to avoid renegotiation as observed in many long term contracts a third case with one sided specific investments can generate take or pay contracts and explain why firms sometimes pay for specific investments that appear to benefit employees directly

vertical contracts in the video rental industry a large body of theoretical work has explored the channels through which vertical contracts can induce efficiency improvements however it is also important to study vertical contracts empirically in order to gain insight into the relative size of different types of efficiency gains in this paper i empirically analyse a contractual innovation in the vertically separated video rental industry prior to 1998 video stores obtained inventory from movie distributors using simple linear pricing contracts in 1998 revenuesharing contracts were widely adopted i investigate the effect of the introduction of revenue sharing contracts on firms profits and consumer welfare i analyse a new panel data set of home video retailers that includes information on individual retailers contract and inventory choices as well as rentals and contract terms for 246 movie titles and 6137 retailers in the u s during each week of 1998 and 1999 and the first half of 2000 a structural econometric model of firms behaviour is developed that describes the nature of firms contract choices estimates from this model indicate that both upstream and downstream profits increase by 10 under the revenue sharing contract for popular titles for less popular titles the effects can be even larger i also estimate that consumers benefit when revenue sharing contracts are adopted

coalitional bargaining with consistent counterfactuals abstract we propose a new solution concept for tu cooperative games in characteristic function form the scoop which builds on the symmetric nash bargaining solution nbs by adding a consistency requirement for negotiations inside every coalition the scoop specifies the probability of success and the payoffs to each coalition the players share the surplus of a coalition according to the nbs the disagreement payoffs are computed as the expectation of payoffs in other coalitions using a common probability distribution that is derived from the prior distribution the predicted outcome can be probabilistic or deterministic but only an efficient coalition can succeed with probability one we discuss the necessary and sufficient conditions for an efficient solution in either case the scoop always exists is generically unique for superadditive games and is easy to compute moreover in the spirit of the nash program we propose a non cooperative protocol whose stationary equilibrium identifies the scoop as the limit equilibrium outcome

the impact of transfer fees on professional sports an analysis of the new transfer system for european football we evaluate the effect of the recently approved transfer system for european professional football which will replace the current system implemented by the bosman judgment in 1995 the focus is on the comparison of wages profits the length of contracts and investment incentives our main findings are that i the new regime reduces a player s overall payoff because it increases the new club s renegotiation payoff and ii since training generates a general skill the new regime will also diminish incentives to invest in the education of young talents because a new club benefits more from the initial club s investment

noncooperative bargaining hostages and optimal asset ownership this paper re examines the effect of asset ownership on investment decisions for a joint relationship in the absence of contracts on investment levels it obtains some results which contradict findings by sanford j grossman oliver d hart and john moore in particular it finds that the loss of ownership of an asset may increase the asset loser s investment incentive the difference between this paper and those authors papers stems from the different interpretations of the roles of the threat point and outside options in bargaining this paper also clarifies the role of relationship specific investments as a cause of integration copyright 1998 by american economic association

collusion exclusion and inclusion in random order bargaining this paper examines the profitability of three types of integration in a cooperative game solved by a random order value e g the shapley value collusion between players i and j is a contract merging their resources in the hands of one of them say i this contract can be represented as a combination of exclusion which lets i exclude j s resource but not use it himself and inclusion which lets i use j s resource but not exclude j from it this representation yields a third difference condition on the characteristic function that determines the profitability of collusion generalizing existing results for specific games namely collusion is profitable unprofitable when the complementarity of the colluding players is reduced increased by other players

discounts as a barrier to entry abstract to what extent can an incumbent manufacturer use discount contracts to foreclose efficient entry we show that off list price rebates that do not commit buyers to unconditional transfers like the rebates in eu commission v michelin ii for instance cannot be anticompetitive this is true even in the presence of cost uncertainty scale economies or intense downstream competition all three market settings where exclusion has been shown to emerge with exclusive dealing contracts the difference stems from the fact that unlike exclusive dealing provisions rebates do not contractually commit retailers to exclusivity when signing the contract jel d43 d86 k21 l13 l14 l42 l60

second sourcing as a commitment monopoly incentives to attract competition we show that a new product monopolist may benefit from delayed competition if consumers incur setup costs setup costs create a dynamic consistency problem the monopolist cannot guarantee low future prices once customers have incurred those costs we show that if customers anticipate this problem the monopolist s profits can be improved through ex ante commitment to competition in the post adoption market if setup costs are large if setup costs are small the monopolist can typically achieve the same level of profits without price commitment as with

exclusive dealing investment promotion may facilitate inefficient foreclosure this paper studies a model whereby exclusive dealing ed can both promote investment and foreclose a more efficient supplier since ed promotes the incumbent seller s investment the seller and the buyer realize a greater surplus from bilateral trade under exclusivity hence the parties involved may sign an ed contract that excludes a more efficient entrant in circumstances where ed would not arise absent investment the paper therefore invites a more cautious attitude towards accepting possible investment promotion arguments as a defense for ed

exclusivity and tying in u s v microsoft what we know and don t know research on capital structure attempts to explain how corporations finance real investment with particular emphasis on the proportions of debt vs equity financing there is no universal theory of the debt equity choice and no reason to expect one but three useful conditional theories are reviewed in this paper the tradeoff theory says that firms seek debt levels that balance the tax advantages of additional debt against the costs of possible financial distress the pecking order theory says that the firm will borrow rather than issuing equity when internal cash flow is not sufficient to fund capital expenditures thus the amount of debt will reflect the firm s cumulative need for external funds the free cash flow theory says that dangerously high debt levels will increase value despite the threat of financial distress each of these theories works for some firms in some circumstances more general theories will require a deeper understanding of the financial objectives of corporate managers

trading between agents for a better match this paper studies externalities that arise when agents can trade outcomes ex post i show that when agents can trade outcomes ex post principals are incentivized to contract with agents ex ante to reduce ex post transfers to outside agents with whom the principals do not directly contract this causes principals to offer agents piece rates that are inefficiently low and lower than the piece rates they would offer if trading was not allowed although trading reduces an agent s effort and could increase the agent s outside option of rejecting a principal s ex ante contract principals ultimately gain from allowing ex post trading because such trading results in outcomes that better match their tastes

can vertical integration by a monopsonist harm consumer welfare abstract vertical integration by a monopsonist is generally believed not to harm consumers this paper demonstrates in a natural economic setting that this conventional wisdom may not hold we model one on one bargaining between a monopsonist and independent suppliers when the set of suppliers cannot be expanded easily ex post and show that a vertically separated monopolist is vulnerable to holdup without integration we demonstrate that a bottleneck monopsonist has an incentive to encourage more upstream entry than would arise in a pure neoclassical monopoly having more suppliers mitigates the holdup power of any one this however distorts the cost structure of the industry toward greater industry output and hence lowers final good prices vertical integration mitigates the hold up problem faced by the monopsonist it allows it to generate and appropriate a greater level of industry profits at the expense of consumers

cooperative investments and the value of contracting recent articles have shown that contracts can support the efficient outcome for bilateral trade even in the face of specific investments and incomplete contracting these studies typically considered selfish investments that benefit the investor e g the seller s investment reduces her production costs the authors find very different results for cooperative investments that directly benefit the investor s partner e g the seller s investment improves the buyer s value of the good most importantly if committing not to renegotiate the contract is impossible then contracting has no value i e the parties cannot do better than to abandon contracting altogether in favor of ex post negotiation

rebates as incentives to exclusivity we show how rebates or fidelity discounts that take the form of lump sum payments made to retailers can be used by an incumbent manufacturer to achieve exclusivity and to deter the entry of a more efficient rival the results which hold whatever the degree of differentiation between retailers and whatever the cost advantage of the entrant are found despite minimizing asymmetries that may favour the incumbent as such there is no need to introduce buyers disorganization discriminatory offers economies of scale non coincident markets or liquidated damages to find that exclusivity can lead to anti competitive effects

asset ownership and contractibility of interaction in a property rights framework i study how organizational form and quantity contracts interact in generating investment incentives the model nests standard property rights and hold up models as special cases i admit general message dependent contracts but provide conditions under which noncontingent contracts are optimal first the article contributes to the foundation of the property rights theory i characterize under which circumstances its predictions are correct when trade is contractible second i study how the optimal use of the incentive instruments depends on the environment finally the model offers a new perspective on the classic fisher body case and produces implications that are empirically testable

exclusive quality exclusive quality in the case of vertically differentiated products bertrand competition at the retail level does not prevent an incumbent upstream firm from using exclusivity contracts to deter the entry of a high quality rival indeed because of differentiation the incumbent s inferior product is not eliminated upon entry due to the resulting competitive pressure a retailer who considers rejecting the exclusivity contract expects to earn much less than the incumbent s monopoly rents thus in equilibrium the incumbent can always offer high enough an upfront payment to induce all retailers to sign the contract and achieve exclusion this is true under linear pricing for intermediate levels of entry costs and with two part tariffs even in the absence of entry costs copyright 2010 the author the journal of industrial economics 2010 blackwell publishing ltd and the editorial board of the journal of industrial economics

free entry and social inefficiency our goal is to provide a simple yet general exposition of the conditions under which the number of entrants in a free entry equilibrium is excessive insufficient or optimal our analysis compares the number of firms that enter a market when there is free entry with the number that would be desired by a social planner who is unable to control the behavior of firms once they are in the market that is we consider the second best problem of choosing the welfare maximizing number of firms while we take as given their noncompetitive behavior after entry we demonstrate that the crucial conditions for establishing the presence of an entry bias can be stated quite simply in terms of the outcome of the postentry game played by entrants in contrast to previous work we do not need to model this postentry game explicitly

a signaling based theory of contractual commitment to relationships abstract in this paper i present signaling as an explanation for how and why parties commit to relationships when they initially contract about the terms of those relationships two forms of contractual commitment to a relationship are considered a promise to trade in the future contracted quantity and a promise not to trade with anyone else contracted exclusivity a party is said to commit more to a relationship if it commits initially to trade a higher quantity and or to a higher level of exclusivity i characterize equilibrium contracts and therefore commitment both the ability to signal information through an exclusivity commitment and whether the informed party commits more to the relationship when the relationship is more likely to succeed depend on the source of the asymmetry of information

power in a theory of the firm transactions take place in the firm rather than in the market because the firm offers power to agents who make specific investments past literature emphasizes the allocation of ownership as the primary mechanism by which the firm does this within the contractibility assumptions of this literature we identify a potentially superior mechanism the regulation of access to critical resources access can be better than ownership because i the power agents get from access is more contingent on their making the right investment and ii ownership has adverse effects on the incentive to specialize the theory explains the importance of internal organization and third party ownership

privatizing agriculture policy options in developing countries abstract this paper examines the background to and options for privatization of state owned enterprises in the agricultural sector in developing countries it identifies areas of the sector where privatization is feasible and those likely to remain under government control it is concluded that while there is some scope for privatization it is unlikely to be as extensive as in other sectors since much of the production is already in private hands there is limited capacity to pay for services and the capability of the private sector is currently low

the hold up problem in a repeated relationship abstract much of the literature on what determines the scope of operations of a producer has centered on the hold up problem the standard results indicate the hold up problem may lead to suboptimal investments and therefore integration may improve the organization of production in this paper we consider a repeated relationship with durable investments and show the possibility of integration improves the choice of investments and there is no integration in equilibrium the equilibrium contract is non exclusive in order to allow the buyer to choose integration in later periods we derive this result in the presence of very simple and incomplete contracts

holdups standard breach remedies and optimal investment in bilateral trading problems the parties may be hesitant to make relationship specific investments without adequate contractual protection we postulate that the parties can sign noncontingent contracts prior to investing and can freely renegotiate them after information about the desirability of trade is revealed we find that such contracts can induce one party to invest efficiently when courts impose either a breach remedy of specific performance or expectation damages moreover specific performance can induce both parties to invest efficiently if a separability condition holds expectation damages on the other hand is poorly suited to solve bilateral investment problems forthcoming the american economic review please contact the program in law and economics at boalt hall school of law uc berkeley berkeley ca 94720 for a copy of this paper

a stochastic model for risk management in global supply chain networks abstract with the increasing emphasis on supply chain vulnerabilities effective mathematical tools for analyzing and understanding appropriate supply chain risk management are now attracting much attention this paper presents a stochastic model of the multi stage global supply chain network problem incorporating a set of related risks namely supply demand exchange and disruption we provide a new solution methodology using the moreau yosida regularization and design an algorithm for treating the multi stage global supply chain network problem with profit maximization and risk minimization objectives

exclusive contracts and demand foreclosure a firm may induce some customers to sign exclusive contracts in order to deprive a rival of the minimum viable size exclude it from the market and enjoy increased market power this strategy may result in socially inefficient exclusion even if the excluded firm is present at the contracting stage and can make counteroffers in addition allowing for breach penalty clauses decreases firms incentives to exclude rivals because such clauses allow a firm to use customers as a conduit for the transfer of another firm s profits

contractual signaling relationship specific investment and exclusive agreements i analyze a model of hold up with asymmetric information at the contracting stage the asymmetry of information concerns the value of trade with external parties i show that contractual signaling and efficiency of investment can conflict if only quantity is contractible this conflict generates inefficient equilibria in terms of investment contracting on exclusivity in addition to quantity resolves the conflict and consequently eliminates the inefficiency of investment

complexity and renegotiation a foundation for incomplete contracts the paper considers a hold up model where only one of n future trading opportunities will prove to be efficient and where ex post renegotiation of the ex ante contract cannot be prevented as the environment becomes more complex n the outcome under any message contingent long term contract converges to that of the incomplete contracting model where trade is contractible ex post but not ex ante when trades are costly to describe both ex ante and ex post the incomplete contracting result is extended to a broader class of environments

patent pools and cross licensing in the shadow of patent litigation this paper develops a framework to analyze the incentives to form a patent pool or engage in cross licensing arrangements in the presence of uncertainty about the validity and coverage of patents that makes disputes inevitable it analyzes the private incentives to litigate and compares them with the social incentives it shows that pooling arrangements can have the effect of sheltering invalid patents from challenges this result has an antitrust implication that patent pools should not be permitted until after patentees have challenged the validity of each other s patents if litigation costs are not too large

supply network capacity planning for semiconductor manufacturing with uncertain demand and correlation in demand considerations abstract a semiconductor supply network involves many expensive steps which have to be executed to serve global markets the complexity of global capacity planning combined with the large capital expenditures to increase factory capacity makes it important to incorporate optimization methodologies for cost reduction and long term planning the typical view of a semiconductor supply network consists of layers for wafer fab sort assembly test and demand centers we present a two stage stochastic integer programming formulation to model a semiconductor supply network the model makes strategic capacity decisions i e build factories or outsource while accounting for the uncertainties in demand for multiple products we use the model not only to analyze how variability in demand affects the make buy decisions but also to investigate how the correlation between demands of different products affects these strategic decisions finally we demonstrate the value of incorporating demand uncertainty into a decision making scheme

break up fees and bargaining power in sequential contracting abstract when a buyer negotiates in sequence with two potential sellers of a good the outcome of each negotiation depends on all three players bargaining powers assuming all parties are symmetrically informed we find that the first seller s payoff is increasing in his own and the second seller s bargaining power on the other hand the second seller s payoff is decreasing in the first seller s bargaining power and in some cases also in his own bargaining power we characterize when contracts will contain break up fees all results extend to the case of a seller negotiating in sequence with two buyers

a multi objective stochastic programming approach for supply chain design considering risk abstract in this paper we develop a multi objective stochastic programming approach for supply chain design under uncertainty demands supplies processing transportation shortage and capacity expansion costs are all considered as the uncertain parameters to develop a robust model two additional objective functions are added into the traditional comprehensive supply chain design problem so our multi objective model includes i the minimization of the sum of current investment costs and the expected future processing transportation shortage and capacity expansion costs ii the minimization of the variance of the total cost and iii the minimization of the financial risk or the probability of not meeting a certain budget the ideas of unreliable suppliers and capacity expansion after the realization of uncertain parameters are also incorporated into the model finally we use the goal attainment technique to obtain the pareto optimal solutions that can be used for decision making

endogenous market structures and contract theory delegation principal agent contracts screening franchising and tying abstract i study the role of unilateral strategic contracts for firms active in markets with price competition and endogenous entry traditional results change substantially when the market structure is endogenous rather than exogenous they concern 1 contracts of managerial delegation to non profit maximizers 2 incentive principal agent contracts in the presence of moral hazard on cost reducing activities 3 screening contracts in case of asymmetric information on the productivity of the managers 4 vertical contracts of franchising in case of hold up problems and 5 tying contracts by monopolists competing also in secondary markets firms use always these contracts to strengthen price competition and manage to obtain positive profits in spite of free entry

structural adjustment policies in developing economies this paper examines structural adjustment policies in ldcs defined as policy responses to external or internal shocks that are carried out with the objective of regaining the pre shock growth path the introductory section of the paper reports on policy experience that indicates that countries applying an outward oriented development strategy were better able to cope with external shocks than economies following an inward oriented strategy it is further shown that the adoption of realistic exchange rates and interest rates the avoidance of large budget deficits and the productive use of the proceeds of foreign borrowing eased the process of adjustment the paper examines in detail the elements of a policy package that may be applied in response to external or internal shocks in the case prevalent in developing economies when optimal policies are not applied thus the recommendations simultaneously aim at responding to shocks and undertaking incentives incentives to save and to invest the choice of public investments sectoral policies in energy and agriculture budgetary policies and monetary policies in the conclusions the interdependence of the various policy measures is indicated with further attention given to foreign borrowing

household bargaining and microfinance abstract this paper examines a household bargaining problem where one household member can use external finance to invest in an uncertain business project faced with limited income generating opportunities we show that the household member will consistently choose safe investment projects we also explain why other members of the household can be made worse off from investment even when aggregate household consumption is expected to rise in a dynamic version of the bargaining problem we study incentives for the household to contribute towards loan repayments and identify conditions under which the borrower will transfer control over her loan to her partner

vertical integration in the presence of upstream competition we analyse vertical integration when there is upstream competition and compare outcomes to the case where upstream assets are owned by a single agent i e upstream monopoly in so doing we make two contributions to the modelling of strategic vertical integration first we base industry structure namely the ownership of assets firmly within the property rights approach to firm boundaries second we model the potential multilateral negotiations using a fully specified non cooperative bargaining model designed to easily compare outcomes achieved under upstream competition and monopoly given this we demonstrate that vertical integration can alter the joint payoffs of integrating parties in ex post bargaining however this bargaining effect is stronger for firms integrating under upstream competition than upstream monopoly we also consider the potential for integration to internalise competitive externalities in manner that cannot be achieved under non integration we demonstrate that ex post monopolization is more likely to occur when there is an upstream monopoly than when there is upstream competition our general conclusion is that the simple intuition that the presence of upstream competition can mitigate and reduce the incentives for socially undesirable vertical integration is misplaced and depending upon the strength of downstream competition i e product differentiation the opposite could easily be the case journal of economic literature classification number l42

does asset ownership always motivate managers outside options and the property rights theory of the firm this paper studies the grossman hart moore ghm property rights approach to the theory of the firm under alternating offers bargaining when managers can pursue other occupations while negotiating over the division of the gains from cooperation the ghm results obtain if taking the best alternative job terminates bargaining outcomes are very different sometimes an agent with an important investment decision should not own the assets he works with sometimes independent assets should be owned together sometimes strictly complementary assets should be owned separately

exclusionary vertical contracts with multiple entrants abstract this paper constructs a model of anticompetitive exclusive dealing in the presence of multiple entrants unlike the single entrant model in previous literature an entrant competes not only with the incumbent to deal with buyers but also with other entrants the competition among entrants then serves as a commitment such that low wholesale prices are offered to buyers when they deviate from exclusive contracts we argue that this commitment effect becomes a barrier to exclusive dealing and that the results differ drastically from the predictions of the single entrant framework

incomplete contracts vertical integration and supply assurance this paper extends the analysis of transactions cost models of vertical integration to multilateral settings its main focus is on supply assurance concerns which arise when several downstream firms are competing for inputs in limited supply integration reduces supply assurance concerns for an integrating firm but it may increase them for others therefore to explain the scope of any firm one must consider the overall network of production and distribution relations three fundamental questions are addressed 1 what are the effects of different integration structures 2 what are the determinants of the socially efficient integration structures 3 in what way do equilibrium integration structures differ from socially efficient structures

competition with exclusive contracts and market share discounts we analyze firms that compete by means of exclusive contracts and market share discounts conditional on the seller s share of customers total purchases with incomplete information about demand firms have a unilateral incentive to use these contractual arrangements to better extract buyers informational rents however exclusive contracts intensify competition thus reducing prices and profits and in all pareto undominated equilibria increasing welfare market share discounts by contrast produce a double marginalization effect that leads to higher prices and harms buyers we discuss the implications of these results for competition policy jel d43 d83 d86 k21 l14 l42 in this paper we study firms that compete by means of exclusive contracts or mar ket share discounts i e discounts that depend on the seller s share of a customer s total purchases these are common yet seldom studied forms of competition the literature has mainly focused on incumbents use of exclusive contracts or marketshare discounts to deter new entrants whilst paying less attention to competitors deploying similar pricing strategies we show that exclusive contracts intensify competition reducing equilibrium prices whereas market share discounts have a double marginalization effect and hence result in higher prices these findings have a bearing on the current lively policy debate 1 fueled by the fact that antitrust authorities view competition by means of exclusive contracts or marketshare discounts with some suspicion to say the least the authorities main concern appears to be that a dominant firm can use exclusivity or market share discounts to eliminate not only potential competitors but also existing ones a prime instance of this is the case of intel intel whose main competitor amd has been operating for years in the microchip sector offered electronics manufacturers discounts that depended on their buying a minimum share of their total purchases of microchips from intel some customers to qualify for the discount had to opt for an exclusive supply contract that

the right of first offer abstract this paper examines the right of first offer which requires a seller to bargain with the contracted buyer before subsequent buyers arrive the contract also prevents the seller from selling his unique asset to subsequent buyers at a price below what he offers to the contracted buyer the right of first offer makes the seller less aggressive in bargaining with the contracted buyer who is privately informed about his valuation such a contract can reduce inter temporal misallocation in which a subsequent buyer gets the asset when the contracted buyer has higher valuation but it also may cause misallocation in which the contracted buyer gets the asset when subsequent buyers have higher valuations overall whether the right of first offer can increase the joint surplus for the seller and the contracted buyer as well as social welfare depends on the contracted buyer s renegotiation power and the distribution of the buyers valuations this paper also discusses the differences between the right of first offer and the most favored customer clause

countervailing power and dynamic efficiency this paper studies the impact of buyer power on dynamic efficiency we consider a bargaining model in which buyer power arises endogenously from size and may impact on a supplier s incentives to invest in lower marginal cost we challenge the view frequently expressed in policy circles that the exercise of buyer power stifles suppliers incentives instead we find that the presence of larger buyers keeps a supplier more on his toes and induces him to improve the competitiveness of his offering in terms of both price and quality relative to buyers alternative options

contracts as rent seeking devices evidence from german soccer recent theoretical research has identified many ways how contracts can be used as rent seeking devices vis a vis third parties but there is no empirical evidence on this issue so far to test some basic qualitative properties of this literature we develop a theoretical and empirical framework in the context of european professional soccer where incumbent teams and players sign binding contracts which however are frequently renegotiated when other teams entrants want to hire the player because they weaken entrants in renegotiations long term contracts are useful rent seeking devices for the contracting parties however they reduce the likelihood of mutually beneficial transfers which generates a trade off in the spirit of aghion and bolton 1987 using a data set from the german bundesliga our model predictions are broadly confirmed jel l14 j63 l40 l83

exclusivity competition and the irrelevance of internal investment this paper considers the effect of exclusive contracts on investment decisions in a market with two upstream and two downstream firms segal and whinston s 2000 irrelevance result is generalized and it is shown that exclusive contracts have no effect on the equilibrium level of internal investment for the contracted parties when competition exists in both the upstream and downstream markets furthermore by considering a more competitive environment we are able to demonstrate that strongly internal investment by rival upstreamdownstream bargaining pairs is similarly unaffected by the presence of exclusive contracts

beyond asset ownership employment and assetless firms in the property rights theory of the firm abstract this paper enriches the celebrated grossman hart moore ghm property rights model with employment relationships by combining the ghm view of the firm as a bundle of asset ownerships with that of alchian and demsetz 1972 who viewed the firm as a nexus of contracts the model yields in some cases optimal asset ownership different from the implications of the ghm model we show that the nexus of contracts is a meaningful instrument to govern transactions even in the presence of asset ownership the optimal contractual network structure depends on the relationship specificity of investments unlike the ghm model where the asset ownership depends solely on the asset specificity of investments

upfront payments and exclusion in downstream markets although upfront payments are often observed in contracts between manufacturers and retailers little is known about their competitive effects or the role retailers play in securing them in this article we consider a model in which two competing retailers make take it or leave it offers to a common manufacturer we find that upfront payments are a feature of equilibrium contracts and in all equilibria only one retailer buys from the manufacturer these findings support the claims of small manufacturers who argue that they are often unable to obtain widespread distribution for their products because of upfront payments copyright 2007 rand

exclusive contracts foster relationship specific investment exclusive contracts prohibit one or both parties from trading with anyone else contrary to earlier findings we show that investments that are specific to the contracting parties may be encouraged by exclusivity results depend on the nature of investments and the bargaining solution the major part of the analysis shows that exclusivity deals designed to assure the supply of essential inputs promote investment infinite penalties for breach even if ex post renegotiable may result in excessive investment in which case a positive but finite damage payment yields the first best outcome

the rise of economics in competition policy a canadian perspective competition policy in canada and elsewhere has changed remarkably over the last 50 yearsin large measure due to advances in economics in this article we trace the impact of developments in industrial organization on the three central areas of competition policy cartels single firm conduct and mergers we focus on canadian competition policy but draw comparisons with developments in the united states and europe

a stochastic dynamic programming approach for multi site capacity planning in tft lcd manufacturing under demand uncertainty abstract the study focuses on the dynamic multi site capacity planning problem in the thin film transistor liquid crystal display tft lcd industry under stochastic demand capacity planning refers to the process of simultaneously implementing a robust capacity allocation plan and capacity expansion policy across multiple sites against stochastic demand in addition the demand situation in tft lcd manufacturing follows markov properties in which the correlations of the demand variations in the consecutive periods are high and the demand status in the next period is stochastically determined by the present one therefore this study constructs a stochastic dynamic programming sdp model with an embedded linear programming lp to generate a capacity planning policy as the demand in each period is revealed and updated using the backward induction algorithm the sdp model considers several capacity expansion and budget constraints to determine a robust and dynamic capacity expansion policy in response to newly available demand information the lp model then considers numerous tft lcd practical characteristics and constraints to decide a capacity allocation plan and generate a one period immediate reward used by the optimality recursion equation of the sdp model numerical results are also illustrated to prove the feasibility and robustness of the proposed sdp model compared to the traditional deterministic capacity planning model currently applied by the industry

market design and investment incentives the purpose of this study was to understand how market design affects market performance through its impact on investment incentives for this purpose we model capacity choices by two ex ante identical firms which compete in the product market we analyse a number of different market design elements including i two commonly used auction formats the uniform price and discriminatory auctions ii price caps and iii bid duration we find that although the discriminatory auction tends to lower prices this does not imply that investment incentives at the margin are poorer indeed aggregate capacity is the same under both auction formats

the role of exclusive contracts in facilitating market transactions vertical contracts between a buyer and a seller often contain exclusivity provisions that restrict their ability to transact with third parties in the future in this paper we develop a matching model in which matched agents first decide whether or not to adopt exclusivity provisions and then bargain over the price of a good in the presence of private information we show that by making disagreement more costly exclusivity provisions reduce the risk of inefficient bargaining breakdowns and that agents find it optimal to adopt exclusive contracts in thin markets but not in thick markets for intermediate levels of market thickness all agents matched and unmatched would be better off if courts did not enforce the exclusivity provisions

agency and strategic contracts theory and evidence from r d agreements in the pharmaceutical industry we examine the use of strategic rights in research and development r d agreements between a client and an agent when an entrant may compete with the client for the license of non contracted discoveries developed by the agent the agent puts effort either in the contracted project or into other r d activities which can result in non contracted discoveries strategic rights help the client and the agent extract rent from the entrant and also motivate the agent to place effort into the contracted project accordingly firms are more likely to adopt strategic rights when the likelihood of entry is larger moreover strategic rights and termination rights are substitutes in mitigating agency problems by investigating r d agreements between pharmaceutical clients and bio tech agents we find consistent evidence of the positive impact of entry threat on the use of strategic rights as well as evidence of the substitution between strategic rights and termination rights

rationalizability learning and equilibrium in games with strategic complementarities we study a rich class of noncooperative games that includes models of oligopoly competition macroeconomic coordination failures arms races bank runs technology adoption and diffusion r d competition pretrial bargaining coordination in teams and many others for all these games the sets of pure strategy nash equilibria correlated equilibria and rationalizable strategies have identical bounds also for a class of models of dynamic adaptive choice behavior that encompasses both best response dynamics and bayesian learning the players choices lie eventually within the same bounds these bounds are shown to vary monotonically with certain exogenous parameters we study the class of noncooperative supermodular games introduced by topkis 1979 and further analyzed by vives 1985 1989 who also pointed out the importance of these games in industrial economics supermodular games are games in which each player s strategy set is partially ordered the marginal returns to increasing one s strategy rise with increases in the competitors strategies so that the game exhibits strategic complementarity 2 and if a player s strategies are multidimensional marginal returns to any one com ponent of the player s strategy rise with increases in the other components this class turns out to encompass many of the most important economic applications of noncooperative game theory in macroeconomics diamond s 1982 search model and bryant s 1983 1984 rational expectations models can be represented as supermodular games in each of these models more activity by some members of the economy raises the returns to increased levels of activity by others in oligopoly theory some models of bertrand oligopoly with differentiated products qualify as supermodu lar games in these games when a firm s competitors raise their prices the marginal profitability of the firm s own price increase rises a similar structure is present in games of new technology adoption such as those of dybvig and spatt 1983 farrell and saloner 1986 and katz and shapiro 1986 when more users hook into a communication system or more manufacturers adopt an interface standard the marginal return to others of doing the same often rises similarly in some specifications of the bank runs model introduced by diamond and dybvig 1983 when more depositors withdraw their funds from a bank it is more worthwhile for other depositors to do the same in the warrant exercise

buyer power and intrabrand coordination we analyze the competitive effects of vertical contracts in a contracting situation where rival retailers offer contracts to a manufacturer in contrast to bernheim and whinston 1998 who study the situation in which competing manufacturers offer contracts to a common retailer we find that two part tariffs even if contingent on exclusivity or not do not suffice to implement the monopolyoutcome richer arrangements including e g conditional fixed fees and upfront payments are thus required to internalize all contracting externalities the welfare implications are ambiguous on the one hand richer contracts ensure that no efficient retailer is excluded on the other hand they allow firms to maintain monopoly prices despite intrabrand competition simulations suggest that the latter effect may be more significant

strategic ex ante contracts rent extraction and opportunity costs this article cosiders the possibility that a seller can contract with one uninformed buyer prior to an auction involving two potential buyers the seller s optimal strategic ex ante contract more accurately reflects joint opportunity costs of the seller and the contracted buyer and therefore extracts more rent from the entrant moreover this ex ante contract mitigates the seller s ex post rent seeking vis a vis the contracted buyer accordingly it may create more social welfare than the absence of ex ante contracts depending upon the contracted buyer s financial constraint and the distributions of trade surplus implementation of the optimal strategic ex ante contract and policy implications are discussed

naked exclusion in the lab the case of sequential contracting in the context of the naked exclusion model of rasmusen ramseyer and wiley 1991 and segal and whinston 2000b we examine whether sequential contracting is more conducive to exclusion in the lab and whether it leads to lower exclusion costs for the incumbent than simultaneous contracting we find that an incumbent who proposes exclusive contracts to buyers sequentially is better able to deter entry than an incumbent who proposes contracts simultaneously in contrast to theory this comes at a substantial cost for the incumbent

vertical integration and innovation abstract innovation is a driving force for most industries where it moreover affects many stages of the vertical chain we study the impact of vertical integration on innovation in an industry where firms need to undertake risky r d investments at both production and distribution stages vertical integration brings better coordination within the integrated firm which boosts its investment incentive at both upstream and downstream levels however it is only mutually beneficial for firms to integrate when both upstream and downstream innovations are important when innovation is irrelevant at one level firms favor instead vertical separation the analysis provides insights for the wave of mergers and r d outsourcing observed in the pharmaceutical industry and other vertically related industries