Contracts and Competition with Large Buyers

Abstract

AbstractThis paper reconsiders the analysis of the competitive effects of buyer con-tracts. In contrast to the previous literature, we do not impose ex anteasymmetry on the contracting opportunities of firms. Rather, we considera market composed of two segments involving small anonymous and largenonanonymous buyers. While the large buyers can contract with each otherand any firm in the market, it is assumed that no such opportunities existfor the small buyers. That is, neither the large buyers nor firms can makecontractual commitments with small buyers. Firms must supply these buyersbased on arms-length (single price oligopolistic) competition. In this envi-ronment, we demonstrate that large buyers will have an incentive to form acoalition with a single firm so as to extract rents from the small customersegment. Market dominance results. The outcome is socially suboptimal aseither production takes place at a higher cost than is otherwise possible orthere is a monopoly for small buyers with an associated allocative loss.Journal of Economic Literature Classification Number: L42Keywords: contracts, competition, allocative efficiency, anonymity.