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The Governance of Exclusive Territories When Dealers can Bootleg

Author

Listed:
  • Shantanu Dutta

    (University of Chicago)

  • Mark Bergen

    (University of Chicago)

  • George John

    (University of Minnesota)

Abstract

A transaction cost approach is used to investigate a manufacturer's policy towards exclusive territory dealers who bootleg (sell across their assigned territories). We show that optimal enforcement policies will generally tolerate some level of bootlegging. This tolerance is a natural consequence of the transaction cost principle that institutional arrangements are not fully enforceable, and that self-enforcing implicit agreements will require some degree of tolerance. The actual degree of tolerance is determined by (a) the importance of reseller services, (b) the reduction in margin realized from surreptitious sales, and (c) the resellers' beliefs about the manufacturer's long-run commitment to the channel. We also show that deploying exclusive territories is beneficial to the manufacturer because it safeguards reseller services and permits resellers to capitalize on their superior local information. However, the latter effect is contingent on being able to convince resellers of the manufacturer's long run commitment to the channel.

Suggested Citation

  • Shantanu Dutta & Mark Bergen & George John, 1994. "The Governance of Exclusive Territories When Dealers can Bootleg," Marketing Science, INFORMS, vol. 13(1), pages 83-99.
  • Handle: RePEc:inm:ormksc:v:13:y:1994:i:1:p:83-99
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    File URL: http://dx.doi.org/10.1287/mksc.13.1.83
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    Citations

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    Cited by:

    1. Ying Xiao & Udatta Palekar & Yunchuan Liu, 2011. "Shades of gray—the impact of gray markets on authorized distribution channels," Quantitative Marketing and Economics (QME), Springer, vol. 9(2), pages 155-178, June.
    2. Salvatore Piccolo & Markus Reisinger, 2011. "Exclusive Territories and Manufacturers' Collusion," Management Science, INFORMS, vol. 57(7), pages 1250-1266, July.
    3. Iravani, Foad & Dasu, Sriram & Ahmadi, Reza, 2016. "Beyond price mechanisms: How much can service help manage the competition from gray markets?," European Journal of Operational Research, Elsevier, vol. 252(3), pages 789-800.
    4. Deligonul, Seyda & Kim, Daekwan & Roath, Anthony S. & Cavusgil, Erin, 2006. "The Achilles' heel of an enduring relationship: Appropriation of rents between a manufacturer and its foreign distributor," Journal of Business Research, Elsevier, vol. 59(7), pages 802-810, July.
    5. Mrinal Ghosh & George John, 2000. "Experimental Evidence for Agency Models of Salesforce Compensation," Marketing Science, INFORMS, pages 348-365.
    6. Desmond (Ho-Fu) Lo & Stephen W. Salant, 2016. "The strategic use of early bird discounts for dealers," Quantitative Marketing and Economics (QME), Springer, vol. 14(2), pages 97-127, June.
    7. Reza Ahmadi & B. Rachel Yang, 2000. "Parallel Imports: Challenges from Unauthorized Distribution Channels," Marketing Science, INFORMS, vol. 19(3), pages 279-294, March.
    8. Daisuke Nikae & Takeshi Ikeda, 2005. "The economic theory of quasi-exclusive territory," Industrial Organization 0508002, EconWPA.
    9. Kim, Keysuk, 2002. "Output sector munificence and supplier control in industrial channels of distribution: a contingency approach," Journal of Business Research, Elsevier, vol. 55(6), pages 427-440, June.
    10. Cruz, Jose M. & Liu, Zugang, 2011. "Modeling and analysis of the multiperiod effects of social relationship on supply chain networks," European Journal of Operational Research, Elsevier, vol. 214(1), pages 39-52, October.
    11. Braouezec, Yann, 2012. "Customer-class pricing, parallel trade and the optimal number of market segments," International Journal of Industrial Organization, Elsevier, vol. 30(6), pages 605-614.
    12. Alberto Sa Vinhas & Jan B. Heide & Sandy D. Jap, 2012. "Consistency Judgments, Embeddedness, and Relationship Outcomes in Interorganizational Networks," Management Science, INFORMS, vol. 58(5), pages 996-1011, May.
    13. Heese, H. Sebastian & Swaminathan, Jayashankar M., 2010. "Inventory and sales effort management under unobservable lost sales," European Journal of Operational Research, Elsevier, vol. 207(3), pages 1263-1268, December.
    14. Müller, Dirk, 2010. "Alliance Coordination, Dysfunctions, and the Protection of Idiosyncratic Knowledge in Strategic Learning Alliances," EconStor Preprints 41039, ZBW - German National Library of Economics.
    15. Anthony Dukes & Esther Gal–Or, 2003. "Negotiations and Exclusivity Contracts for Advertising," Marketing Science, INFORMS, vol. 22(2), pages 222-245, November.
    16. Francois FULCONIS, 2010. "Inter-company Cooperation Faced with a Risk of Organisational Sclerosis: Opportunism as a Potential Source of Performance?," Timisoara Journal of Economics, West University of Timisoara, Romania, Faculty of Economics and Business Administration, vol. 3(2(10)), pages 85-98.
    17. Arturs Kalnins, 2004. "An Empirical Analysis of Territorial Encroachment Within Franchised and Company-Owned Branded Chains," Marketing Science, INFORMS, vol. 23(4), pages 476-489, September.
    18. Jiang, Xu & Bao, Yongchuan & Xie, Yan & Gao, Shanxing, 2016. "Partner trustworthiness, knowledge flow in strategic alliances, and firm competitiveness: A contingency perspective," Journal of Business Research, Elsevier, vol. 69(2), pages 804-814.

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