Relationships on the Rocks: Contract Evolution in a Market for Ice
American Economic Journal: Microeconomics
vol. 14,
no. 1, February 2022
(pp. 330-65)
Abstract
Firms use relational contracts to support repeated trade. Do these informal agreements evolve in response to market conditions? In a market for ice, firms reestablish relationships on new terms when a prior agreement breaks down. Using transaction data, we show that ice retailers prioritize deliveries to loyal buyers—fishing firms—when supply from the monopolistic manufacturer is scarce. After an upstream shock to competition increases supply, repeated trade lapses, threatening retailers' positions. Incumbent retailers establish a new agreement expanding trade credit to loyal buyers, which impedes new retailer entry. Upstream competition also increases downstream firms' productivity and lowers consumer fish prices.Citation
Ghani, Tarek, and Tristan Reed. 2022. "Relationships on the Rocks: Contract Evolution in a Market for Ice." American Economic Journal: Microeconomics, 14 (1): 330-65. DOI: 10.1257/mic.20190166Additional Materials
JEL Classification
- D24 Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
- D86 Economics of Contract: Theory
- L12 Monopoly; Monopolization Strategies
- L14 Transactional Relationships; Contracts and Reputation; Networks
- L81 Retail and Wholesale Trade; e-Commerce
- O14 Industrialization; Manufacturing and Service Industries; Choice of Technology
- Q22 Renewable Resources and Conservation: Fishery; Aquaculture
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