Joshua S. Gans and Stephen P. King

"Contracts and competition for large buyers," International Journal of Industrial Organization Volume 20, Issue 9, November 2002, pages 1363-81.
JEL codes
: L42
Keywords: contracts, competition, allocative efficiency, anonymity

Abstract: This paper reconsiders the analysis of the competitive effects of buyer contracts. In contrast to the previous literature, we do not impose ex ante asymmetry on the contracting opportunities of firms. Rather, we consider a market composed of two segments involving small anonymous and large nonanonymous buyers. While the large buyers can contract with each other and any firm in the market, it is assumed that no such opportunities exist for the small buyers. That is, neither the large buyers nor firms can make contractual commitments with small buyers. Firms must supply these buyers based on arms-length (single price oligopolistic) competition. In this environment, we demonstrate that large buyers will have an incentive to form a coalition with a single firm so as to extract rents from the small customer segment. Market dominance results. The outcome is socially suboptimal as either production takes place at a higher cost than is otherwise possible or there is a monopoly for small buyers with an associated allocative loss.