Learning‐by‐doing and contract choice

Abstract

This study examines vertical agreements that occur when suppliers experience learning‐by‐doing, which makes them more productive over time and poses a competitive threat to their rivals. Consequently, a dominant supplier arranges payments that reference the rival good. This study contributes to the existing literature by showing that the dominant supplier chooses specific contracts to reap optimal benefit from its rival's efficiency gains. These contracts restrict the rival, harm consumers, and reduce welfare when the rival is exceptionally efficient or expects significant improvements through learning‐by‐doing. Therefore, this study emphasizes the significance of foreseeable innovations and their implications in antitrust proceedings.