Relation-Based Governance and Competition

Relational governance works well in relatively small communities, which may be too small to allow perfect competition. This paper explores this idea using two models. In a spatial model with monopolistic competition, relational governance constrains the size of firms and can lead to inefficiently excessive entry. In a model where high quality is self-enforcing because its providers get a sufficiently large flow of rents, profitable entry at a scale that credibly signals high quality may be infeasible, and incumbents may be able to deter entry while getting supernormal profits. Address of author: Department of Economics Princeton University Princeton, NJ 08544–1021, USA. E-mail: [email protected] Web: http://www.princeton.edu/ ̃ dixitak/home ∗Paper for the Tilburg Law and Economics Center (TILEC) workshop on ‘Economic Governance and Competition: The Pros and Cons of Private Ordering in the Shadow of the Law’, Sep.30-Oct.1, 2010. This is a highly preliminary version; please do not quote or cite. Comments welcome.