Exclusivity, Competition and the Irrelevance of Internal Investments

Catherine C. de Fontenay, Melbourne Business School
Joshua S. Gans, Melbourne Business School, University of Melbourne
Vivienne Groves, Melbourne Business School

Abstract

This paper considers the effect of exclusive contracts on investment decisions in a market with two upstream and two downstream firms. Segal and Whinston’s (2000) irrelevance result is generalized and it is shown that exclusive contracts have no effect on the equilibrium level of internal investment for the contracted parties when competition exists in both the upstream and downstream markets. Furthermore, by considering a more competitive environment we are able to demonstrate that strongly internal investment by rival upstream-downstream bargaining pairs is similarly unaffected by the presence of exclusive contracts.