Open Price Contracts, Locked-In Buyers, and Opportunism

Abstract

There is a large literature on incomplete contracts, but one prominent type of incomplete contract has largely gone unnoticed. An "open price contract" is one in which a buyer commits to purchasing goods from a seller even though the price has not been agreed upon at the time of signing. Open price contracts generally give the seller the right to set prices ex post, and the buyer is then obligated to purchase from the seller at those prices. This gives rise to obvious incentives for short-run opportunistic pricing by the seller, but also obvious disincentives from long-run reputational consequences. In this article, we focus on a specific application where open price contracts are common, discuss why buyers enter into such contracts, and test for opportunistic ex-post pricing by sellers on their locked-in buyers. We find that opportunistic incentives are dominated by long-run reputational incentives and to a surprising degree.