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Exclusive Contracts, Innovation, and Welfare

Author

Listed:
  • Yongmin Chen
  • David E. M. Sappington
Abstract
We extend Philippe Aghion and Patrick Bolton's (1987) 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 patent protection and/or the incumbent's R&D ability are sufficiently pronounced. The exclusive contract generally reduces the entrant's R&D, and can reduce the incumbent's R&D. Exclusive contracts reduce welfare if the incumbent's R&D ability is sufficiently limited, but can increase welfare if patent protection and the incumbent's R&D ability are sufficiently pronounced. (JEL D86, L14, O31)

Suggested Citation

  • Yongmin Chen & David E. M. Sappington, 2011. "Exclusive Contracts, Innovation, and Welfare," American Economic Journal: Microeconomics, American Economic Association, vol. 3(2), pages 194-220, May.
    • Handle: RePEc:aea:aejmic:v:3:y:2011:i:2:p:194-220
    Note: DOI: 10.1257/mic.3.2.194
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    References listed on IDEAS

    as
    1. Motta, Massimo & Persson, Lars & Fumagalli, Chiara, 2005. "Exclusive Dealing, Entry and Mergers," CEPR Discussion Papers 4902, C.E.P.R. Discussion Papers.
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    10. repec:bla:jindec:v:45:y:1997:i:4:p:445-56 is not listed on IDEAS
    11. David Meza & Mariano Selvaggi, 2007. "Exclusive contracts foster relationship-specific investment," RAND Journal of Economics, RAND Corporation, vol. 38(1), pages 85-97, March.
    12. Abito, Jose Miguel & Wright, Julian, 2008. "Exclusive dealing with imperfect downstream competition," International Journal of Industrial Organization, Elsevier, vol. 26(1), pages 227-246, January.
    13. Greenlee, Patrick & Reitman, David & Sibley, David S., 2008. "An antitrust analysis of bundled loyalty discounts," International Journal of Industrial Organization, Elsevier, vol. 26(5), pages 1132-1152, September.
    14. Kathryn E. Spier & Michael D. Whinston, 1995. "On the Efficiency of Privately Stipulated Damages for Breach of Contract: Entry Barriers, Reliance, and Renegotiation," RAND Journal of Economics, The RAND Corporation, vol. 26(2), pages 180-202, Summer.
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    Citations

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    Cited by:

    1. Kitamura, Hiroshi & Matsushima, Noriaki & Sato, Misato, 2018. "Exclusive contracts with complementary inputs," International Journal of Industrial Organization, Elsevier, vol. 56(C), pages 145-167.
    2. Giacomo Calzolari & Vincenzo Denicolò, 2015. "Exclusive Contracts and Market Dominance," American Economic Review, American Economic Association, vol. 105(11), pages 3321-3351, November.
    3. Hiroshi Kitamura & Noriaki Matsushima & Misato Sato, 2024. "How Does Downstream Firms’ Efficiency Affect Exclusive Supply Agreements?," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 64(2), pages 219-242, March.
    4. Dugoua, Eugenie & Dumas, Marion, 2021. "Green product innovation in industrial networks: A theoretical model," Journal of Environmental Economics and Management, Elsevier, vol. 107(C).
    5. Roberto Burguet & József Sákovics, 2017. "Competitive foreclosure," RAND Journal of Economics, RAND Corporation, vol. 48(4), pages 906-926, December.
    6. Yongmin Chen, 2014. "Refusal to Deal, Intellectual Property Rights, and Antitrust," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 30(3), pages 533-557.
    7. Roig, Guillem, 2014. "Competition and the Hold‐U p Problem: a Setting with Non‐exclusive Contracts," TSE Working Papers 14-481, Toulouse School of Economics (TSE).

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    More about this item

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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