A healthy national economy is sustained in part by the ability of competition to induce efficiency among firms. Circumstances in which the welfare of a society is reduced by a lack of competition warrant an explicit and thorough investigation. Exclusive contracts between buyers and sellers are one of these situations that has been theoretically shown to have the potential to hinder competition and decrease efficiency through deterred entry. This project uses experimental methods to examine the efficiency consequences and policy implications surrounding a type of exclusive contract, often referred to as a naked exclusion, which restricts the signed buyer to purchase solely from a specific seller.
There has been a scholarly debate as to whether these types of exclusive contracts are ever used in an anticompetitive fashion. Using mathematical models and intuitive observations, some theorists have demonstrated that efficiency-enhancing entry can profitably and successfully be deterred under certain circumstances. This project takes aspects of the theoretical models to a setting where financially motivated individuals make decisions that affect earnings in the same way firm profits are determined. The use of experiments provides a natural way to examine actual behavior under various market conditions while affording advantages in the form of enhanced control and facilitated replication. This project thus provides an ideal way to test the existing theory using the decisions of human subjects while adding to the scarce data and complementing the relatively limited empirical work.
The experiments, which are conducted using a new online program, are based on the structure of the existing theoretical literature that depicts a situation where an incumbent monopolist, in the face of potential entry by a rival seller, can choose to offer an amount to each buyer willing to sign an exclusive contract. In addition to testing adherence of behavior to theoretical predictions, comparisons across different treatments test the effect of various market conditions such as simultaneous versus sequential buyer decisions, the number of buyers, and buyer communication on the probability of observing deterred entry and decreased efficiency. The results are then applied to determine whether exclusive contracts in real-world industries with specific market characteristics are likely to inefficiently limit competition. In addition, the laboratory allows for replication with both undergraduate students and MBA students with business experience.
Broader Impacts The benefits of this research to society include a better understanding of the potential harmful effects of exclusive contracts and the determinants of the likelihood of their occurrence. This may influence antitrust policy or more specifically, it may have an effect on how certain antitrust suits are evaluated (i.e., whether or not they are unlawfully harmful to consumers and society). Moreover, the analysis of the experimental results will be disseminated in the form of a doctoral dissertation and both the data and online program will be made publicly available. Not only will this allow others to conduct further experimental research in this area, but the program can also be used as a tool for teaching. Using the experiment for classroom instruction would be an exciting and interactive way for students to learn about exclusive contracts.
