Article
Journal of Law, Economics & Organization

Exclusivity, Contingent Control Rights, and the Design of Internet Portal Alliances

By: Josh Lerner and Dan Elfenbein

Format:Print

Abstract

We explore the relationship between exclusivity and state-contingent control rights using a sample of over 100 Internet portal alliance contracts. We find that stronger exclusivity arrangements are associated with more frequent usage of contingent control rights. For both portals and their partners, the more exclusively bound one party is, the more likely its counterparty is to be granted contingent control rights. Additionally, we find that portals' alliance partners are more likely to receive contingent control rights when they are prohibited from doing business with other portals and that contingent control rights are less likely to appear as the industry matures. Our findings are consistent with theoretical explanations that exclusivity provisions and contingent control rights both provide incentives to invest in the face of potential holdup problems and also with the proposition that exclusive arrangements lead firms to seek contingent control rights to avoid lock-in when environmental uncertainty is high.