Scandinavian Working Papers in Economics

Discussion Paper Series in Economics,
Norwegian School of Economics, Department of Economics

No 5/2020: Exclusionary contracts and incentives to innovate

Simen A. Ulsaker ()
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Simen A. Ulsaker: Dept. of Economics, Norwegian School of Economics and Business Administration, Postal: NHH, Department of Economics, Helleveien 30, N-5045 Bergen, Norway

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.

Keywords: Vertical relations; Exclusive contracts; Innovation

JEL-codes: L22; L42

21 pages, April 27, 2020

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