We consider the strategic incentives to invest in an environment where suppliers compete with nonexclusive contracts. When trade is nonexclusive, that is, the buyer relates with many suppliers simultaneously, the buyer's investment affects her outside option when excluding a supplier. The buyer's investment allows for cheaper substitution of the trade loss arising from the excluded supplier. In equilibrium, even though each supplier fully appropriates the investment return it receives in isolation, the buyer wants to invest to gain leverage over competing suppliers. Our model uncovers an essential role of nonexclusive contracts because they promote the buyer to invest.
All Science Journal Classification (ASJC) codes
- Business, Management and Accounting(all)
- Economics and Econometrics