Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/331600 
Year of Publication: 
2025
Series/Report no.: 
CESifo Working Paper No. 12134
Publisher: 
Munich Society for the Promotion of Economic Research - CESifo GmbH, Munich
Abstract: 
Sellers face a critical choice: run competitive auctions or strike exclusive deals with preferred buyers. Contrary to conventional wisdom that sellers should rely on open competition, we show that a powerful seller optimally commits to a sequential `flexclusivity' arrangement - a strategic mix of exclusivity and competitive bidding. Under broad conditions, the seller chooses with positive probability to disregard alternative buyers entirely. We demonstrate, in a parsimonious model, that simple option contracts implement flexclusivity efficiently, increasing the expected joint profit of the contracting parties. When a preferred buyer declines the option, this credibly signals his weakness, allowing the seller to extract more rent from stronger buyers in subsequent auctions. The joint gain from such arrangements can represent as much as 75% of what vertical integration would achieve, without requiring commitment beyond the initial contracting stage.
Subjects: 
selling mechanism
exclusivity
revenue-maximizing auction
option contract
vertical integration
JEL: 
D44
D82
D86
L22
Document Type: 
Working Paper
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