Relationship-Specific Investment as a Barrier to Entry

41 Pages Posted: 24 Oct 2011 Last revised: 5 Sep 2016

See all articles by Hiroshi Kitamura

Hiroshi Kitamura

Kyoto Sangyo University

Akira Miyaoka

Rissho University

Misato Sato

Okayama University - Economics

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

Kitamura, Hiroshi and Miyaoka, Akira and Sato, Misato, Relationship-Specific Investment as a Barrier to Entry (March 25, 2016). Journal of Economics, Vol. 119(1), pp. 17-45, September 2016 , Available at SSRN: https://ssrn.com/abstract=1948073 or http://dx.doi.org/10.2139/ssrn.1948073

Hiroshi Kitamura (Contact Author)

Kyoto Sangyo University ( email )

Motoyama, Kamigamo, Kita-Ku
Kyoto, Kyoto 603-8555
Japan

HOME PAGE: http://sites.google.com/view/hiroshikitamura/home

Akira Miyaoka

Rissho University ( email )

4-2-16
Osaki
Shinagawa, Tokyo 141-8602
Japan

Misato Sato

Okayama University - Economics ( email )

Japan

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