2004), Rent-Shifting, Exclusion, and Market-Share Discounts, working paper

We study the economics of rent-shifting using a three-party sequential contracting environment in which two sellers negotiate with a common buyer. We find that overall joint payoff is maximized in this environment under a variety of plausible restrictions on contracts, even though, in equilibrium, surplus extraction may not be complete. The division of surplus depends on the set of feasible contracts, the relationship between the sellers ’ products, and the bargaining power of the firms. We use the model to evaluate the distributional consequences and welfare effects of legal restrictions on below-cost pricing and market-share discounts. We find that such restrictions may actually induce exclusion in the long run if the buyer is able to commit to purchase from a single seller