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Exclusive dealing as a barrier to entry? Evidence from automobiles

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  • Laura NURSKI
  • Frank VERBOVEN

Abstract

Exclusive dealing contracts between manufacturers and retailers force new entrants to set up their own costly dealer networks to enter the market. We ask whether such contracts may act as an entry barrier, and provide an empirical analysis of the European car market. We first estimate a demand model with product and spatial differentiation, and quantify the role of a dense distribution network in explaining the car manufacturers’ market shares. We then perform policy counterfactuals to assess the pro.t incentives and entry-deterring effects of exclusive dealing. We find that there are no individual incentives to maintain exclusive dealing, but there can be a collective incentive by the industry as a whole, even absent efficiencies. Furthermore, a ban on exclusive dealing would shift market shares from the larger European firms to the smaller entrants. More importantly, consumers would gain substantially, mainly because of the increased spatial availability and less so because of intensified price competition. Our findings suggest that the European Commission’s recent decision to facilitate exclusive dealing in the car market may not have been warranted.

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Paper provided by Katholieke Universiteit Leuven, Centrum voor Economische Studiën in its series Center for Economic Studies - Discussion papers with number ces11.37.

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Date of creation: Dec 2011
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Handle: RePEc:ete:ceswps:ces11.37

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  1. Peter Davis, 2006. "Spatial competition in retail markets: movie theaters," RAND Journal of Economics, RAND Corporation, vol. 37(4), pages 964-982, December.
  2. Boone, Jan & Müller, Wieland & Suetens, Sigrid, 2009. "Naked exclusion: Towards a behavioral approach to exclusive dealing," CEPR Discussion Papers 7303, C.E.P.R. Discussion Papers.
  3. Bonnet, Céline & Dubois, Pierre, 2009. "Inference on Vertical Contracts between Manufacturers and Retailers Allowing for Nonlinear Pricing and Resale Price Maintenance," TSE Working Papers 09-040, Toulouse School of Economics (TSE).
  4. Chiara Fumagalli & Massimo Motta, 2006. "Exclusive Dealing and Entry, when Buyers Compete," American Economic Review, American Economic Association, vol. 96(3), pages 785-795, June.
  5. Sofia Berto Villas-Boas, 2007. "Vertical Relationships between Manufacturers and Retailers: Inference with Limited Data," Review of Economic Studies, Wiley Blackwell, vol. 74(2), pages 625-652, 04.
  6. Chamberlain, Gary, 1982. "Multivariate regression models for panel data," Journal of Econometrics, Elsevier, vol. 18(1), pages 5-46, January.
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