Naked Exclusion: An Experimental Study of Contracts with Externalities

Landeo, Claudia M. and Spier, Kathryn E. (2007): Naked Exclusion: An Experimental Study of Contracts with Externalities.

Abstract

This paper reports the results of an experiment designed to assess the ability of an incumbent seller to profitably foreclose a market with exclusive contracts. We use the strategic environment described by Rasmusen, Ramseyer, and Wiley (1991) and Segal and Whinston (2000) where entry is unprofitable when sufficiently many downstream buyers sign exclusive contracts with the incumbent. When discrimination is impossible, the game resembles a stag-hunt (coordination) game in which the buyers' payoffs are endogenously chosen by the incumbent seller. Exclusion occurs when the buyers fail to coordinate on their preferred equilibrium. Two-way non-binding pre-play communication among the buyers lowers the power of exclusive contracts and induces more generous contract terms from the seller. When discrimination and communication are possible, the exclusion rate rises. Divide-and-conquer strategies are observed more frequently when buyers can communicate with each other. Exclusion rates are significantly higher when the buyers' payoffs are endogenously chosen rather than exogenously given. Finally, secret offers are shown to decrease the incumbent's power to profitably exclude.

• Item Type: MPRA Paper
• Language: English
• Keywords: Bargaining with Externalities; Contracting with Externalities; Experiments; Exclusive Dealing; Antitrust; Discrimination; Endogenous Payoffs; Communication; Coordination Games; Equilibrium Selection
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D86 - Economics of Contract: Theory; C - Mathematical and Quantitative Methods > C9 - Design of Experiments; L - Industrial Organization > L0 - General; K - Law and Economics > K0 - General; K - Law and Economics > K2 - Regulation and Business Law > K21 - Antitrust Law; D - Microeconomics > D4 - Market Structure, Pricing, and Design; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance; L - Industrial Organization > L4 - Antitrust Issues and Policies; C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C72 - Noncooperative Games

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