Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

Thursday, March 5, 2009

Exclusive Contracts, Innovation, and Welfare

Posted by D. Daniel Sokol

Yongmin Chen (University of Colorado - Economics) and David E. M. Sappington (University of Florida - Economics) have a wonderful paper on Exclusive Contracts, Innovation, and Welfare.

ABSTRACT: We extend Aghion and Bolton (1987)’s classic model to analyze the equilibrium incidence and impact of exclusive contracts in a setting where research and development (R&D) drives industry performance. An exclusive contract between an incumbent supplier and a buyer arises when inno- vation protection and/or the incumbent’s R&D ability are su¢ ciently pronounced. The exclusive contract generally reduces the entrant’s R&D, and sometimes also reduces the incumbent’s R&D. Exclusive contracts reduce welfare if patent protection for innovation or the incumbent’s R&D ability is su¢ ciently limited. Exclusive contracts increase welfare if patent protection and the incumbent’s R&D ability are both su¢ ciently pronounced.

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