Antitrust & Competition Policy Blog

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

Tuesday, May 26, 2020

Exclusionary Contracts and Incentives to Innovate

Simen A. Ulsaker, Norwegian School of Economics (NHH) offers Exclusionary Contracts and Incentives to Innovate.

ABSTRACT: The article considers a situation where several firms have the opportunity to sell an identical product to a set of buyers, and where each seller can invest in R&D to develop a higher quality version of the product in question. I consider the possibility of allowing the sellers to offer exclusionary contracts, prior to deciding how much to invest in R&D. In equilibrium every buyer will sign an exclusionary contract with the same seller. Since all buyers are locked to one seller, only this seller will have an incentive to invest in R&D. Whether or not banning exclusionary contracts increases the aggregate probability of successful innovation depends on the R&D technology. More specifically, banning exclusionary contracts will increase the aggregate probability of innovation and joint surplus of buyers and sellers only when the R&D technology exhibits sufficient diseconomies of scale.

https://lawprofessors.typepad.com/antitrustprof_blog/2020/05/exclusionary-contracts-and-incentives-to-innovate.html

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