Contracts as entry deterrence

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Seminar paper from the year 2009 in the subject Law - Civil / Private / Trade / Anti Trust Law / Business Law, grade: 1, 3, Otto-von-Guericke-University Magdeburg (Fakultät für Wirtschaftswissenschaft), course: Incentives in Markets and Organizations, language: English, abstract: Contracts between buyers and sellers can have social welfare decreasing effects. They prevent entry of entrants with lower production costs than the incumbent, even though they not always prevent it entirely. The buyers may be better of accepting a contract, when the price and liquidated damages specified in it generate higher surplus for the buyer than without a contract. However, the contracts are disadvantageous for other society members. Free-rider problems occur, too. New financial means (options) may diminish the negative effects of contracts. In considering contracts' implications entirely, also their duration is important.