The Design and Duration of Contracts: Strategic and Efficiency Considerations

Abstract

A vast body of economic theory is concerned with the way in which parties design contracts to align incentives and promote efficient exchange.' An alternate view, however, ascribes to contract design a more sinister purposethat of excluding or otherwise disadvantaging rival firms.2 Although the latter argument has tended to target a specific set of suspect practices such as tie-in and exclusive dealing arrangements, recent efforts have begun to associate strategic objectives with more conventional pricing and incentive terms in contracts, including such common provisions as multi-part pricing schedules3 and stipulated damages clauses.4 In the course of developing and applying the antitrust laws, the courts have analyzed the effects of various contractual provisions on competition. The resulting body of law recognizes that contracts have the potential to exclude competitors but also that exclusion can serve efficiency purposes.5 The broadening of exclusion claims to include the strategic use of common contractual designs, and the corresponding potential to challenge a widely used class of contractual arrangements on antitrust grounds, stand to complicate rule-of-reason analyses of anticompetitive exclusion and raise