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The Role of Exclusive Contracts in Facilitating Market Transactions, Journal of Industrial Economics

Abstract

In many settings a buyer and a seller who are in a bilateral trading relationship agree on contractual clauses that make it more difficult for either one of them to trade with third parties in the future. Prominent examples include exclusive supplier contracts, break-up clauses in preliminary merger agreements, and rights of first refusal that restrict the transferability of shares in closed corporations. The law and economics literature has focused on two broad explanations for the use of such contracts: they are either seen as anti-competitive weapons that restrict entry or as efficiency enhancing instruments that protect relationship-specific investments. In this paper we analyze a third potential reason for the use of contractual trade restrictions. In particular, we argue that such restrictions can facilitate bargaining between the contracting parties and thus reduce the risk of bargaining breakdowns. This motivation for contractual trade restrictions has been discussed informally by other authors but has so far not been analyzed formally. We derive the conditions under which contractual trade restrictions do or not facilitate bargaining. This allows us to derive a number of policy implications (for instance, exclusive contracts should be enforced in thin markets but not in thick markets) and empirical predictions (for instance, break-up fees are initially increasing in market thickness and then decreasing).

Type

Article

Author(s)

Niko Matouschek, Paolo Ramezzana

Date Published

2007

Citations

Matouschek, Niko, and Paolo Ramezzana. 2007. The Role of Exclusive Contracts in Facilitating Market Transactions. Journal of Industrial Economics. 55(2): 197-222.

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