Exclusive Territories and Manufacturers' Collusion
AbstractThis paper highlights the rationale for exclusive territories in a model of repeated interaction between competing supply chains. We show that with observable contracts exclusive territories have two countervailing effects on manufacturers' incentives to sustain tacit collusion. First, granting local monopolies to retailers softens competition in a one-shot game. Hence, punishment profits are larger, thereby rendering deviation more profitable. Second, exclusive territories stifle deviation profits because retailers of competing brands adjust their prices to the wholesale contract offered by a deviant manufacturer, whereas intrabrand competition prevents such "instantaneous reaction." We show that the latter effect tends to dominate, thereby making exclusive territories a more suitable organizational mode to cooperate. These insights are robust to endogenous communication between manufacturers. We also consider retailers' service investments. Here, a novel effect emerges that softens the procollusive value of exclusive territories: Retailers of a deviant manufacturer increase investments, which renders deviation more profitable. This paper was accepted by Preyas Desai, marketing.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by INFORMS in its journal Management Science.
Volume (Year): 57 (2011)
Issue (Month): 7 (July)
exclusive territories; supply chains; tacit collusion; information sharing; vertical restraints;
Other versions of this item:
- Salvatore Piccolo & Markus Reisinger, 2010. "Exclusive Territories and Manufacturers’ Collusion," CSEF Working Papers 249, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 22 Feb 2011.
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Bian, Junsong & Lai, Kin Keung & Hua, Zhongsheng, 2013. "Upstream collusion and downstream managerial incentives," Economics Letters, Elsevier, vol. 118(1), pages 97-100.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc).
If references are entirely missing, you can add them using this form.