Contracts as a Barrier to Entry
Author(s): Philippe Aghion and Patrick Bolton
It is shown that an incumbent seller who faces a threat of entry into his or her
market will sign long-term contracts that prevent the entry of some lower-cost
producers even though they do not preclude entry completely. Moreover, when a
seller possesses superior information about the likelihood of entry, it is shown that
the length of the contract may act as a signal of the true probability of entry.