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Exclusionary contracts and incentives to innovate

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  • Ulsaker, Simen A.

    (Dept. of Economics, Norwegian School of Economics and Business Administration)

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.

Suggested Citation

  • Ulsaker, Simen A., 2020. "Exclusionary contracts and incentives to innovate," Discussion Paper Series in Economics 5/2020, Norwegian School of Economics, Department of Economics.
    • Handle: RePEc:hhs:nhheco:2020_005
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    References listed on IDEAS

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    More about this item

    Keywords

    Vertical relations; Exclusive contracts; Innovation;
    All these keywords.

    JEL classification:

    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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