Exclusive Contracts and Protection of Investments

Innovation and Economic Growth and Competition Policy and Antitrust

Article Snapshot


Ilya Segal and Michael Whinston


RAND Journal of Economics, Vol. 31, No. 4, pp. 603-633, Winter 2000


This paper looks at how contracts between buyers and sellers affect investment.

Policy Relevance

Exclusive contracts sometimes tend to protect investment. Exclusive contracts can tend to benefit consumers, but not always.

Main Points

  • An exclusive contract between a buyer and a seller stops one party from dealing with an outside party. Some are concerned that these contracts limit competition; others point out that, like property rights, they help parties feel safe to invest.

  • Whether a contract is exclusive affects other terms of the contract, including the price.

  • Imagine a contract between a buyer and a seller stops the buyer from buying from an external source.
    • When the contract can be renegotiated, exclusivity does not encourage the seller to invest in production methods with lower costs, but when it cannot be renegotiated, the seller is more likely to invest.

  • Buyers' and sellers' actions can affect the value of their deals with suppliers, retailers, and consumers. Such exclusive contracts can increase investments that raise the value of the product to the buyer. Other contract terms can have the same effect, including quantity commitments.

  • Ticketmaster has the exclusive right to sell 80% of the seats at certain concerts. But training workers to use Ticketmaster’s system did not help the theaters in dealing with others. So Ticketmaster’s deal probably did not protect investment.

  • Exclusive contracts can help firms and workers manage their relationship, or can help them control managers trying to profit at the firm’s expense.

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