IDEAS home Printed from https://ideas.repec.org/a/inm/ormksc/v32y2013i2p246-270.html
   My bibliography  Save this article

Exclusive Handset Arrangements in the Wireless Industry: A Competitive Analysis

Author

Listed:
  • Upender Subramanian

    (Naveen Jindal School of Management, University of Texas at Dallas, Richardson, Texas 75080)

  • Jagmohan S. Raju

    (The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104)

  • Z. John Zhang

    (The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104)

Abstract

In many markets, a handset vendor and a service provider may enter into a tie-in for a handset to be available exclusively through the service provider. We examine when and why a service provider and a handset vendor may find this arrangement mutually profitable. We find that an exclusive handset arrangement (EHA) may serve a dual strategic purpose. By restricting its handsets to one service provider, a handset vendor may be able to induce a rival handset vendor to compete less aggressively. At the same time, the service provider may be able to essentially raise a rival service provider's handset costs by limiting the handsets available to the rival. Interestingly, the handset vendor's market share may be higher when its handset is sold exclusively than when it is not. Our results might explain why EHAs seem more attractive in some markets than in others, why some service providers have exclusive arrangements even for handset models that do not seem popular, and how some handset vendors enjoy high market shares despite having many exclusive models. Furthermore, an EHA may lower the handset vendor's incentives to improve handset quality, supporting concerns raised by proponents of wireless network neutrality.

Suggested Citation

  • Upender Subramanian & Jagmohan S. Raju & Z. John Zhang, 2013. "Exclusive Handset Arrangements in the Wireless Industry: A Competitive Analysis," Marketing Science, INFORMS, vol. 32(2), pages 246-270, March.
  • Handle: RePEc:inm:ormksc:v:32:y:2013:i:2:p:246-270
    DOI: 10.1287/mksc.1120.0752
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mksc.1120.0752
    Download Restriction: no

    File URL: https://libkey.io/10.1287/mksc.1120.0752?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. K. Sridhar Moorthy, 1988. "Strategic Decentralization in Channels," Marketing Science, INFORMS, vol. 7(4), pages 335-355.
    2. Salop, Steven C & Scheffman, David T, 1983. "Raising Rivals' Costs," American Economic Review, American Economic Association, vol. 73(2), pages 267-271, May.
    3. Jeffrey D. Shulman & Anne T. Coughlan & R. Canan Savaskan, 2010. "Optimal Reverse Channel Structure for Consumer Product Returns," Marketing Science, INFORMS, vol. 29(6), pages 1071-1085, 11-12.
    4. Xuan Zhao & Derek Atkins & Yong Liu, 2009. "Effects of distribution channel structure in markets with vertically differentiated products," Quantitative Marketing and Economics (QME), Springer, vol. 7(4), pages 377-397, December.
    5. Amiya Basu & Padmal Vitharana, 2009. "—Impact of Customer Knowledge Heterogeneity on Bundling Strategy," Marketing Science, INFORMS, vol. 28(4), pages 792-801, 07-08.
    6. Anne T. Coughlan & Birger Wernerfelt, 1989. "On Credible Delegation by Oligopolists: A Discussion of Distribution Channel Management," Management Science, INFORMS, vol. 35(2), pages 226-239, February.
    7. J. Miguel Villas-Boas, 1994. "Sleeping with the Enemy: Should Competitors Share the Same Advertising Agency?," Marketing Science, INFORMS, vol. 13(2), pages 190-202.
    8. Lal, Rajiv & Villas-Boas, J Miguel, 1996. "Exclusive Dealing and Price Promotions," The Journal of Business, University of Chicago Press, vol. 69(2), pages 159-172, April.
    9. Anil Arya & Brian Mittendorf & David E. M. Sappington, 2008. "The Make-or-Buy Decision in the Presence of a Rival: Strategic Outsourcing to a Common Supplier," Management Science, INFORMS, vol. 54(10), pages 1747-1758, October.
    10. J. Miguel Villas-Boas, 2009. "Product Variety and Endogenous Pricing with Evaluation Costs," Management Science, INFORMS, vol. 55(8), pages 1338-1346, August.
    11. Chen, Yongmin, 1997. "Equilibrium Product Bundling," The Journal of Business, University of Chicago Press, vol. 70(1), pages 85-103, January.
    12. Sibley, David S. & Weisman, Dennis L., 1998. "Raising rivals' costs: The entry of an upstream monopolist into downstream markets," Information Economics and Policy, Elsevier, vol. 10(4), pages 451-470, December.
    13. David Martimort, 1996. "Exclusive Dealing, Common Agency, and Multiprincipals Incentive Theory," RAND Journal of Economics, The RAND Corporation, vol. 27(1), pages 1-19, Spring.
    14. Heide, Jan B & Dutta, Shantanu & Bergen, Mark, 1998. "Exclusive Dealing and Business Efficiency: Evidence from Industry Practice," Journal of Law and Economics, University of Chicago Press, vol. 41(2), pages 387-407, October.
    15. Robin S. Lee, 2013. "Vertical Integration and Exclusivity in Platform and Two-Sided Markets," American Economic Review, American Economic Association, vol. 103(7), pages 2960-3000, December.
    16. Wei-yu Kevin Chiang & Dilip Chhajed & James D. Hess, 2003. "Direct Marketing, Indirect Profits: A Strategic Analysis of Dual-Channel Supply-Chain Design," Management Science, INFORMS, vol. 49(1), pages 1-20, January.
    17. Oliver Hart & Jean Tirole, 1990. "Vertical Integration and Market Foreclosure," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(1990 Micr), pages 205-286.
    18. Salop, Steven C & Scheffman, David T, 1987. "Cost-Raising Strategies," Journal of Industrial Economics, Wiley Blackwell, vol. 36(1), pages 19-34, September.
    19. Carmen Matutes & Pierre Regibeau, 1988. ""Mix and Match": Product Compatibility without Network Externalities," RAND Journal of Economics, The RAND Corporation, vol. 19(2), pages 221-234, Summer.
    20. Preyas Desai & Oded Koenigsberg & Devavrat Purohit, 2004. "Strategic Decentralization and Channel Coordination," Quantitative Marketing and Economics (QME), Springer, vol. 2(1), pages 5-22, March.
    21. Anthony Dukes & Esther Gal–Or, 2003. "Negotiations and Exclusivity Contracts for Advertising," Marketing Science, INFORMS, vol. 22(2), pages 222-245, November.
    22. Liang Guo & Juanjuan Zhang, 2012. "Consumer Deliberation and Product Line Design," Marketing Science, INFORMS, vol. 31(6), pages 995-1007, November.
    23. Rasmusen, Eric B & Ramseyer, J Mark & Wiley, John S, Jr, 1991. "Naked Exclusion," American Economic Review, American Economic Association, vol. 81(5), pages 1137-1145, December.
    24. Patrick Rey & Joseph Stiglitz, 1995. "The Role of Exclusive Territories in Producers' Competition," RAND Journal of Economics, The RAND Corporation, vol. 26(3), pages 431-451, Autumn.
    25. Elie Ofek & Zsolt Katona & Miklos Sarvary, 2011. ""Bricks and Clicks": The Impact of Product Returns on the Strategies of Multichannel Retailers," Marketing Science, INFORMS, vol. 30(1), pages 42-60, 01-02.
    26. Timothy W. McGuire & Richard Staelin, 1983. "An Industry Equilibrium Analysis of Downstream Vertical Integration," Marketing Science, INFORMS, vol. 2(2), pages 161-191.
    27. Riordan, Michael H, 1998. "Anticompetitive Vertical Integration by a Dominant Firm," American Economic Review, American Economic Association, vol. 88(5), pages 1232-1248, December.
    28. G.F. Mathewson & R.A. Winter, 1984. "An Economic Theory of Vertical Restraints," RAND Journal of Economics, The RAND Corporation, vol. 15(1), pages 27-38, Spring.
    29. Matutes, Carmen & Regibeau, Pierre, 1992. "Compatibility and Bundling of Complementary Goods in a Duopoly," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 37-54, March.
    30. Economides, Nicholas, 1989. "Desirability of Compatibility in the Absence of Network Externalities," American Economic Review, American Economic Association, vol. 79(5), pages 1165-1181, December.
    31. Devavrat Purohit, 1997. "Dual Distribution Channels: The Competition Between Rental Agencies and Dealers," Marketing Science, INFORMS, vol. 16(3), pages 228-245.
    32. Daniel P. O'Brien & Greg Shaffer, 1997. "Nonlinear Supply Contracts, Exclusive Dealing, and Equilibrium Market Foreclosure," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(4), pages 755-785, December.
    33. Mathewson, G Frank & Winter, Ralph A, 1987. "The Competitive Effects of Vertical Agreements: Comment," American Economic Review, American Economic Association, vol. 77(5), pages 1057-1062, December.
    34. Rey, Patrick & Tirole, Jean, 1986. "The Logic of Vertical Restraints," American Economic Review, American Economic Association, vol. 76(5), pages 921-939, December.
    35. 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.
    36. Chen, Yongmin, 2001. "On Vertical Mergers and Their Competitive Effects," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 667-685, Winter.
    37. Nanda Kumar & Ranran Ruan, 2006. "On manufacturers complementing the traditional retail channel with a direct online channel," Quantitative Marketing and Economics (QME), Springer, vol. 4(3), pages 289-323, September.
    38. Géarard Gaudet & Ngo Van Long, 1996. "Vertical Integration, Foreclosure, and profits in the Presence of Double Marginalization," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(3), pages 409-432, September.
    39. Whinston, Michael D, 1990. "Tying, Foreclosure, and Exclusion," American Economic Review, American Economic Association, vol. 80(4), pages 837-859, September.
    40. Jay Pil Choi & Sang-Seung Yi, 2000. "Vertical Foreclosure with the Choice of Input Specifications," RAND Journal of Economics, The RAND Corporation, vol. 31(4), pages 717-743, Winter.
    41. Jeffrey D. Shulman & Anne T. Coughlan & R. Canan Savaskan, 2009. "Optimal Restocking Fees and Information Provision in an Integrated Demand-Supply Model of Product Returns," Manufacturing & Service Operations Management, INFORMS, vol. 11(4), pages 577-594, December.
    42. Shaffer Greg, 2005. "Slotting Allowances and Optimal Product Variety," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 5(1), pages 1-28, June.
    43. Lin, Y Joseph, 1990. "The Dampening-of-Competition Effect of Exclusive Dealing," Journal of Industrial Economics, Wiley Blackwell, vol. 39(2), pages 209-223, December.
    44. Joseph Farrell & Hunter K. Monroe & Garth Saloner, 1998. "The Vertical Organization of Industry: Systems Competition versus Component Competition," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 7(2), pages 143-182, June.
    45. Krattenmaker, Thomas G & Salop, Steven C, 1986. "Competition and Cooperation in the Market for Exclusionary Rights," American Economic Review, American Economic Association, vol. 76(2), pages 109-113, May.
    46. John Vickers, 1995. "Competition and Regulation in Vertically Related Markets," Review of Economic Studies, Oxford University Press, vol. 62(1), pages 1-17.
    47. Shugan, Steven M, 1980. "The Cost of Thinking," Journal of Consumer Research, Oxford University Press, vol. 7(2), pages 99-111, Se.
    48. Stefanadis, Christodoulos, 1998. "Selective Contracts, Foreclosure, and the Chicago School View," Journal of Law and Economics, University of Chicago Press, vol. 41(2), pages 429-450, October.
    49. John Simpson & Abraham L. Wickelgren, 2007. "Naked Exclusion, Efficient Breach, and Downstream Competition," American Economic Review, American Economic Association, vol. 97(4), pages 1305-1320, September.
    50. Andrei Hagiu & Robin S. Lee, 2011. "Exclusivity and Control," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 20(3), pages 679-708, September.
    51. Ehrlich Everett M. & Eisenach Jeffrey A. & Leighton Wayne A., 2010. "The Impact of Regulation on Innovation and Choice in Wireless Communications," Review of Network Economics, De Gruyter, vol. 9(1), pages 1-51, February.
    52. Economides, Nicholas, 1998. "The incentive for non-price discrimination by an input monopolist," International Journal of Industrial Organization, Elsevier, vol. 16(3), pages 271-284, May.
    53. Jeffrey D. Shulman & Anne T. Coughlan & R. Canan Savaskan, 2011. "Managing Consumer Returns in a Competitive Environment," Management Science, INFORMS, vol. 57(2), pages 347-362, February.
    54. Bikram Ghosh & Subramanian Balachander, 2007. "Research Note--Competitive Bundling and Counterbundling with Generalist and Specialist Firms," Management Science, INFORMS, vol. 53(1), pages 159-168, January.
    55. David Besanko & Martin K. Perry, 1993. "Equilibrium Incentives for Exclusive Dealing in a Differentiated Products Oligopoly," RAND Journal of Economics, The RAND Corporation, vol. 24(4), pages 646-668, Winter.
    56. Anne T. Coughlan, 1985. "Competition and Cooperation in Marketing Channel Choice: Theory and Application," Marketing Science, INFORMS, vol. 4(2), pages 110-129.
    57. T. Vanacker & S. Manigart & M. Meuleman & L. Sels, 2011. "Bootstrapping as a Resource Dependence Management Strategy and its Association with Startup Growth," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 11/740, Ghent University, Faculty of Economics and Business Administration.
    58. Ordover, Janusz A & Saloner, Garth & Salop, Steven C, 1990. "Equilibrium Vertical Foreclosure," American Economic Review, American Economic Association, vol. 80(1), pages 127-142, March.
    59. Dmitri Kuksov & J. Miguel Villas-Boas, 2010. "When More Alternatives Lead to Less Choice," Marketing Science, INFORMS, vol. 29(3), pages 507-524, 05-06.
    60. O'Brien, Daniel P & Shaffer, Greg, 1993. "On the Dampening-of-Competition Effect of Exclusive Dealing," Journal of Industrial Economics, Wiley Blackwell, vol. 41(2), pages 215-221, June.
    61. Michael A. Salinger, 1988. "Vertical Mergers and Market Foreclosure," The Quarterly Journal of Economics, Oxford University Press, vol. 103(2), pages 345-356.
    62. Banerjee, Samiran & Lin, Ping, 2003. "Downstream R&D, raising rivals' costs, and input price contracts," International Journal of Industrial Organization, Elsevier, vol. 21(1), pages 79-96, January.
    63. Subramanian Balachander & Bikram Ghosh & Axel Stock, 2010. "Why Bundle Discounts Can Be a Profitable Alternative to Competing on Price Promotions," Marketing Science, INFORMS, vol. 29(4), pages 624-638, 07-08.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Gielens, Katrijn & Gijsbrechts, Els & Dekimpe, Marnik G., 2014. "Gains and losses of exclusivity in grocery retailing," International Journal of Research in Marketing, Elsevier, vol. 31(3), pages 239-252.
    2. Upender Subramanian & Jagmohan S. Raju & Z. John Zhang, 2014. "The Strategic Value of High-Cost Customers," Management Science, INFORMS, vol. 60(2), pages 494-507, February.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107687899, December.
    2. Roberto Hernán González & Praveen Kujal, 2012. "Vertical integration, market foreclosure and quality investment," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 11(1), pages 1-20, April.
    3. Cao, Qingning & Geng, Xianjun & Zhang, Jun, 2015. "Strategic Role of Retailer Bundling in a Distribution Channel," Journal of Retailing, Elsevier, vol. 91(1), pages 50-67.
    4. Michiel Bijlsma & Viktoria Kocsis & Victoria Shestalova & Gijsbert Zwart, 2008. "Vertical foreclosure: a policy framework," CPB Document 157, CPB Netherlands Bureau for Economic Policy Analysis.
    5. Markus Reisinger & Tim Paul Thomes, 2017. "Manufacturer collusion: Strategic implications of the channel structure," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 26(4), pages 923-954, December.
    6. Cooper, James C. & Froeb, Luke M. & O'Brien, Dan & Vita, Michael G., 2005. "Vertical antitrust policy as a problem of inference," International Journal of Industrial Organization, Elsevier, vol. 23(7-8), pages 639-664, September.
    7. Matsushima, Noriaki & Mizuno, Tomomichi, 2013. "Vertical separation as a defense against strong suppliers," European Journal of Operational Research, Elsevier, vol. 228(1), pages 208-216.
    8. Zava Aydemir & Stefan Buehler, 2002. "Estimating Vertical Foreclosure in U.S. Gasoline Supply," SOI - Working Papers 0212, Socioeconomic Institute - University of Zurich.
    9. Oana Secrieru, 2006. "The Economic Theory Of Vertical Restraints," Journal of Economic Surveys, Wiley Blackwell, vol. 20(5), pages 797-822, December.
    10. Sass, Tim R., 2005. "The competitive effects of exclusive dealing: Evidence from the U.S. beer industry," International Journal of Industrial Organization, Elsevier, vol. 23(3-4), pages 203-225, April.
    11. Zanchettin, Piercarlo & Mukherjee, Arijit, 2017. "Vertical integration and product differentiation," International Journal of Industrial Organization, Elsevier, vol. 55(C), pages 25-57.
    12. Kitamura, Hiroshi & Matsushima, Noriaki & Sato, Misato, 2018. "Exclusive contracts with complementary inputs," International Journal of Industrial Organization, Elsevier, vol. 56(C), pages 145-167.
    13. Jullien, Bruno & Reisinger, Markus & Rey, Patrick, 2019. "Personalized Pricing and Distribution Strategies," TSE Working Papers 19-995, Toulouse School of Economics (TSE), revised Mar 2022.
    14. Salvatore Piccolo & Markus Reisinger, 2011. "Exclusive Territories and Manufacturers' Collusion," Management Science, INFORMS, vol. 57(7), pages 1250-1266, July.
    15. Etro, Federico, 2016. "Research in economics and industrial organization," Research in Economics, Elsevier, vol. 70(4), pages 511-517.
    16. Rosenkranz, Stephanie & Schmitz, Patrick W., 2001. "Vertikale Unternehmenskooperationen," MPRA Paper 6930, University Library of Munich, Germany.
    17. Gérard P. Cachon & A. Gürhan Kök, 2010. "Competing Manufacturers in a Retail Supply Chain: On Contractual Form and Coordination," Management Science, INFORMS, vol. 56(3), pages 571-589, March.
    18. Tommy Staahl Gabrielsen & Lars Sørgard, 1999. "Exclusive versus Common Dealership," Southern Economic Journal, John Wiley & Sons, vol. 66(2), pages 353-366, October.
    19. Milliou, Chrysovalantou, 2020. "Vertical integration without intrafirm trade," Economics Letters, Elsevier, vol. 192(C).
    20. David Spector, 2011. "Exclusive contracts and demand foreclosure," RAND Journal of Economics, RAND Corporation, vol. 42(4), pages 619-638, December.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormksc:v:32:y:2013:i:2:p:246-270. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/inforea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Matthew Walls (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.