This paper characterizes equilibrium exclusionary contracts between buyers, an incumbent firm, and a potential entrant when buyers can either vertically integrate or contract with the outside entrant. In this setting, exclusionary contracts are generally shown to be efficient and to deter inefficient entry that would otherwise occur. With multiple unorganized buyers, equilibrium contracts are shown to take a "divide-and-conquer" form and, in some cases, to deter some efficient entry. In such cases, efficient contracting can be restored by a policy that prohibits price discrimination and gives agents free reign to sign exclusionary agreements.

Journal Article Government Target Price Intervention in Economies with Incomplete Markets Get access Robert Innes Robert Innes University of California, Davis Search for other works by this author on: Oxford Academic Google Scholar The Quarterly Journal of Economics, Volume 105, Issue 4, November 1990, Pages 1035–1052, https://doi.org/10.2307/2937884 Published: 01 November 1990

This paper considers a model of probabilistic law enforcement in which a violator can undertake remediation that reduces the harm caused. In an optimal regime, violators are prompted to voluntarily remediate—or self‐police—by the promise of a reduced sanction when they do so. Self‐policing increases efficiency in two ways: (1) efficient remediation is achieved early and with certainty, rather than only when a violator is apprehended; and (2) the enforcement effort needed to deter violations is often reduced. Switching to a self‐policing enforcement regime leads optimally to less government enforcement activity and less deterrence.

This paper characterizes equilibrium exclusionary contracts between buyers, an incumbent firm, and a potential entrant when buyers can either vertically integrate or contract with the outside entrant. In this setting, exclusionary contracts are generally shown to be efficient and to deter inefficient entry that would otherwise occur. With multiple unorganized buyers, equilibrium contracts are shown to take a 'divide-and-conquer' form and, in some cases, to deter some efficient entry. In such cases, efficient contracting can be restored by a policy that prohibits price discrimination and gives agents free reign to sign exclusionary agreements. Copyright 1994 by American Economic Association.