Relationship-Specific Investment as a Barrier to Entry
41 Pages Posted: 24 Oct 2011 Last revised: 5 Sep 2016
Date Written: March 25, 2016
Abstract
This study constructs a model of a relationship-specific investment in a dynamic framework. Although such investment decreases operating costs and increases the current joint profits of firms in vertical relationships, its specificity reduces the ex-post flexibility to change a trading partner in the future. We demonstrate that whether the investment contract deters entry even in the absence of exclusionary terms depends on not only the specificity but also the efficiency of the investment. We also show that an increase in the investment efficiency does not necessarily improve the equilibrium social welfare.
Keywords: Vertical Relation; Entry Deterrence; Relationship-Specific Investment; Switching Costs
JEL Classification: L12, L41, L42
Suggested Citation: Suggested Citation
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