Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/149865 
Year of Publication: 
2016
Series/Report no.: 
ESMT Working Paper No. 15-02 (R1)
Version Description: 
Revised version
Publisher: 
European School of Management and Technology (ESMT), Berlin
Abstract: 
Considering markets with non-pivotal buyers we analyze the anti-competitive effects of breakup fees used by an incumbent facing a more efficient entrant in the future. Buyers differ in their intrinsic switching costs. Breakup fees are profitably used to foreclose entry, regardless of the entrant's efficiency advantage or level of switching costs. Banning breakup fees is beneficial to consumers and enhances the total welfare unless the entrant's efficiency is close to the incumbent's. Inefficient foreclosure arises not because of rent shifting from the entrant, but because the incumbent uses the long-term contract to manipulate consumers' expected surplus from not signing it.
older Version: 
Document Type: 
Working Paper

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