Contract contingency in vertically related markets

Over the last years, courts are increasingly inclined to consider precontractual arrangements as binding contracts, endowing them with commitment value that can be used strategically by the party that proposes them. We study the optimal precontractual arrangement offers of an upstream monopolist producing an essential input that may sell to two vertically differentiated downstream firms. These arrangements concern the exclusivity and the contingency of the contracts to be signed. Once the precontractual arrangements have been determined, the terms of the contracts are negotiated between the upstream supplier and the downstream firm(s). The distribution of bargaining power during the contract terms negotiations is the main driving force of the monopolist's choices. A powerful supplier always opts for an exclusive contract. By contrast, a weaker supplier offers nonexclusive contracts and makes each of them contingent or noncontingent such as to guarantee the most favorable outside option in its negotiations.