Exclusivity Contracts, Insurance and Financial Market Foreclosure

Argenton, Cédric;Willems, Bert
(2012) The Journal of Industrial Economics — Vol. 60, n° 4, p. 609-630 (2012)

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  • Argenton, CédricTilburg University
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  • Willems, BertUCLouvain
    Author
Abstract
We study the trade-off between the positive effects (risk-sharing) and negative effects (exclusion) of exclusivity contracts. We revisit the seminal model of Aghion and Bolton [1987] under risk-aversion and show that although exclusivity contracts induce optimal risk-sharing, they can be used not only to deter the entry of a more efficient rival into the product market but also to crowd out financial investors willing to insure the buyer at competitive rates. We further show that in a world without financial investors, purely financial bilateral instruments, such as forward contracts, achieve optimal risk-sharing without distorting product market outcomes. Thus, risk-sharing alone cannot be invoked to defend exclusivity contracts.
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Argenton, C., & Willems, B. (2012). Exclusivity Contracts, Insurance and Financial Market Foreclosure. The Journal of Industrial Economics, 60(4), 609-630. https://doi.org/10.1111/joie.12000 (Original work published 2012)