ACADEMIC ARTICLE SUMMARY

Naked Exclusion: Comment

Article Source: American Economic Review, Vol. 90, No. 1, pp. 296-309, 2000
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Time to Read: 1 minute read
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ARTICLE SUMMARY

Summary:

This comment looks at how contracts with sellers help or harm buyers.

POLICY RELEVANCE

Policy Relevance:

When there is one seller and many buyers, exclusive contracts tend to benefit sellers more than buyers.

KEY TAKEAWAYS

Key Takeaways:
  • In an exclusive contract between a buyer and seller, the buyer promises to buy only from the seller. When there is only one seller and many buyers, sellers can use such contrasts to profit at buyers’ expense.
    • Some argue that sellers must offer buyers a good price to persuade buyers to accept an exclusive contract. But this is not always true.

  • When there are several buyers, they might have trouble acting in concert. Each might assume the others will sign exclusive contracts, so see no reason to avoid signing itself. No buyer has the power to reject the exclusive deal and make a difference overall.

  • When sellers can negotiate different deals with different buyers (discriminate) sellers will tend to have more power in negotiations with buyers.
    • The seller could offer exclusive deals only to some buyers, and none to others.
    • If buyers deal with the seller at different times, the sellers can “divide and conquer,” and have more power to insist on exclusive arrangements without offering buyer a good price.

  • These economic tendencies can also affect mergers, takeovers, licensing negotiations, and other situations.

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Ilya Segal

About Ilya Segal

Ilya R. Segal is the Roy and Betty Anderson Professor in the Department of Economics. Before joining the Stanford faculty in 1999, he was an assistant professor of economics at the University of California, Berkeley.

Michael Whinston

About Michael Whinston

Michael D. Whinston is the Sloan Fellows Professor of Management in the Applied Economics Group at MIT Sloan and Professor of Economics in the Economics Department. His research has covered a variety of topics in microeconomics and industrial organization, including firm behavior in oligopolistic markets, antitrust, game theory, the design of contracts and organizations, law and economics, and most recently health economics.