Contracts as a Barrier to Entry: Impact of Buyer's Asymmetric Information and Bargaining Power

David Martimort (1, 2) , Jérôme Pouyet (3, 4) , Thomas Trégouët (3)

1 PSE - Paris School of Economics
2 PJSE - Paris Jourdan Sciences Economiques
3 THEMA - Théorie économique, modélisation et applications
4 ESSEC Business School

An incumbent seller contracts with a buyer and faces the threat of entry. The contract stipulates a price and a penalty for breach if the buyer later switches to the entrant. Sellers are heterogenous in terms of the gross surplus they provide to the buyer. The buyer is privately informed on her valuation for the incumbent's service. Asymmetric information makes the incumbent favor entry as it helps screening buyers. When the entrant has some bargaining power vis-à-vis the buyer and keeps a share of the gains from entry, the incumbent instead wants to reduce entry. The compounding effect of these two forces may lead to either excessive entry or foreclosure, and possibly to a fixed rebate for exclusivity given to all buyers.

Mots clés: Foreclosure; Excessive entry; Exclusionary behavior; Incomplete information

Domaines: Economies et finances; Économie et finance quantitative [q-fin]

David Martimort, Jérôme Pouyet, Thomas Trégouët. Contracts as a Barrier to Entry: Impact of Buyer's Asymmetric Information and Bargaining Power. International Journal of Industrial Organization, 2021, 79, pp.102791. ⟨10.1016/j.ijindorg.2021.102791⟩. ⟨hal-03328387v2⟩