COMPETITION THROUGH ENDOGENIZED TOURNAMENTS - AN INTERPRETATION OF FACE-TO-FACE COMPETITION

This paper presents an alternative solution, called ''face-to-face'' c ompetition, to the hold-up problem of relation-specific investments in the world of incomplete contracts. By inherent multiplicity of equili bria and incentive-compatible equilibrium selection, a tournament amon g multiple agents is endogenously created in the structure of face-to- face competition to strengthen their investment incentive. This approa ch also explains, by the reason other than bargaining power and insura nce, why typical auto-assemblers in Japan do not vertically integrate a single parts supplier but transact with two potentially competitive suppliers in their developments of new models. J. Japan. Int. Econ., S eptember 1996, 10(3), pp. 199-232. Faculty of Economics, Seikei Univer sity; Faculty of Economics, The University of Tokyo; and Faculty of Ec onomics, Hosei University. (C) 1996 Academic Press, Inc.