Strategic ex ante contracts: rent extraction and opportunity costs

This article cosiders the possibility that a seller can contract with one uninformed buyer prior to an auction involving two potential buyers. The seller optimal strategic ex ante contract more accurately reflects joint opportunity costs of the seller and the contracted buyer and therefore extracts more rent from the entrant. Moreover this ex ante contract mitigates the seller ex post rent seeking vis-a-vis the contracted buyer Accordingly, it may create more social welfare than the absence of ex ante contracts, depending upon the contracted buyer financial constraint and the distributions of trade surplus. Implementation of the optimal strategic ex ante contract and policy implications are discussed