Exclusivity as Inefficient Insurance

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Abstract

It is well established that an incumbent firm may use exclusivity contracts so as to monopolize an industry or deter entry. Such an anticompetitive practice could be tolerated if it were associated with sufficiently large efficiency gains, e.g. insuring buyers against price volatility. In this paper we study the trade-off between positive effects (risk sharing) and negative effects (exclusion) of exclusivity contracts. We revisit the seminal model of Aghion and Bolton (1987) under risk-aversion and show that although exclusivity contracts induce optimal risk-sharing, they can be used not only to deter the entry of a more efficient rival on the product market but also to crowd out financial investors willing to insure the buyer at competitive rates. We further show that in a world without financial investors, purely financial bilateral instruments, such as forward contracts, achieve optimal risk sharing without distorting product market outcomes. Thus, there is no room for an insurance defense of exclusivity contracts.
Original languageEnglish
Place of PublicationTilburg
PublisherMicroeconomics
Number of pages30
Volume2009-24
Publication statusPublished - 2009

Publication series

NameCentER Discussion Paper
Volume2009-24

Fingerprint

Insurance
Exclusivity
Investors
Product market
Optimal risk sharing
Buyers
Industry
Forward contracts
Trade-offs
Exclusion
Efficiency gains
Risk aversion
Bilateral
Risk sharing
Price volatility
Incumbents
Crowd-out

Keywords

  • exclusivity
  • contracts
  • monopolization
  • risk-aversion
  • risk-sharing
  • damages

Cite this

Argenton, C., & Willems, B. (2009). Exclusivity as Inefficient Insurance. (CentER Discussion Paper; Vol. 2009-24). Tilburg: Microeconomics.
Argenton, C. ; Willems, Bert. / Exclusivity as Inefficient Insurance. Tilburg : Microeconomics, 2009. (CentER Discussion Paper).
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Argenton, C & Willems, B 2009 'Exclusivity as Inefficient Insurance' CentER Discussion Paper, vol. 2009-24, Microeconomics, Tilburg.

Exclusivity as Inefficient Insurance. / Argenton, C.; Willems, Bert.

Tilburg : Microeconomics, 2009. (CentER Discussion Paper; Vol. 2009-24).

Research output: Working paperDiscussion paperOther research output

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AB - It is well established that an incumbent firm may use exclusivity contracts so as to monopolize an industry or deter entry. Such an anticompetitive practice could be tolerated if it were associated with sufficiently large efficiency gains, e.g. insuring buyers against price volatility. In this paper we study the trade-off between positive effects (risk sharing) and negative effects (exclusion) of exclusivity contracts. We revisit the seminal model of Aghion and Bolton (1987) under risk-aversion and show that although exclusivity contracts induce optimal risk-sharing, they can be used not only to deter the entry of a more efficient rival on the product market but also to crowd out financial investors willing to insure the buyer at competitive rates. We further show that in a world without financial investors, purely financial bilateral instruments, such as forward contracts, achieve optimal risk sharing without distorting product market outcomes. Thus, there is no room for an insurance defense of exclusivity contracts.

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Argenton C, Willems B. Exclusivity as Inefficient Insurance. Tilburg: Microeconomics. 2009. (CentER Discussion Paper).