Breaking and entering’ of contracts as a matter of bargaining power and exclusivity clauses

S. Rosenkranz, G.U. Weitzel

Research output: Working paperAcademic

Abstract

We analyze the effect of liquidated damage rules in exclusive contracts
that are negotiated in a sequential bargaining process between one seller
and two buyers with endogenous outside options. We show that assumptions
on the distribution of bargaining power influence the size of the payment
of damages and determine which contractual party benefits from
including liquidated damage rules. Furthermore, we show that the effect
of the payment of damages on the efficiency of the consummated deals
depends on the possibility to sign more than one contract. Only if this
is not possible, damage rules may prevent the breaking and entering of
contracts and thus lead to inefficient deals in the market of corporate control,
or allow for ‘naked’ exclusion in the context of supplier contracts with
externalities.
Original languageEnglish
Place of PublicationUtrecht
PublisherUU USE Tjalling C. Koopmans Research Institute
Number of pages34
Publication statusPublished - 2011

Publication series

NameDiscussion Paper Series / Tjalling C. Koopmans Research Institute
No.06
Volume11
ISSN (Electronic)2666-8238

Keywords

  • sequential bargaining
  • bargaining power
  • outside option
  • liquidated damage rules
  • termination fees
  • exclusivity agreements

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