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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 consumers' valuations for dealer proximity and dealer exclusivity. We then perform policy counterfactuals to assess the profit incentives and possible entry-deterring effects of exclusive dealing. We find that there are no unilateral incentives to maintain exclusive dealing, but there is a collective incentive for the industry as a whole. Furthermore, a ban on exclusive dealing would raise the smaller entrants' market share. But more importantly, consumers would gain, not so much because of increased price competition, but rather because of the increased spatial availability, which compensates for the demand inefficiency from a loss of dealer exclusivity.

Suggested Citation

  • Laura Nurski & Frank Verboven, 2016. "Exclusive Dealing as a Barrier to Entry? Evidence from Automobiles," Review of Economic Studies, Oxford University Press, vol. 83(3), pages 1156-1188.
  • Handle: RePEc:oup:restud:v:83:y:2016:i:3:p:1156-1188.
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    File URL: http://hdl.handle.net/10.1093/restud/rdw002
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    Cited by:

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    3. Xiao, Junji & Ju, Heng, 2016. "The determinants of dealership structure: Empirical analysis of the Chinese auto market," Journal of Comparative Economics, Elsevier, vol. 44(4), pages 961-981.
    4. Durrmeyer, Isis, 2018. "Winners and Losers: The Distributional Effects of the French Feebate on the Automobile Market," TSE Working Papers 18-950, Toulouse School of Economics (TSE).
    5. Charles Murry & Yiyi Zhou, 2020. "Consumer Search and Automobile Dealer Colocation," Management Science, INFORMS, vol. 66(5), pages 1909-1934, May.
    6. Itai Ater, 2015. "Vertical Foreclosure Using Exclusivity Clauses: Evidence from Shopping Malls," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 24(3), pages 620-642, September.
    7. Muriel Fadairo & Jianyu Yu, 2014. "Economic Rationales of Exclusive Dealing ; Empirical Evidence from the French Distribution Networks," Working Papers 1405, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    8. Xavier D’Haultfœuille & Isis Durrmeyer & Philippe Février, 2019. "Automobile Prices in Market Equilibrium with Unobserved Price Discrimination," Review of Economic Studies, Oxford University Press, vol. 86(5), pages 1973-1998.
    9. Schmidt, Peter, 2020. "The effect of car sharing on car sales," International Journal of Industrial Organization, Elsevier, vol. 71(C).
    10. Stépahne Auray & Nicolas Lepage-Saucier & Purevdorj Tuvaandor, 2018. "Doubly Robust GMM Inference and Differentiated Products Demand Models," Working Papers 2018-13, Center for Research in Economics and Statistics.
    11. Olivier De Groote & Frank Verboven, 2019. "Subsidies and Time Discounting in New Technology Adoption: Evidence from Solar Photovoltaic Systems," American Economic Review, American Economic Association, vol. 109(6), pages 2137-2172, June.
    12. Fadairo, Muriel & Yu, Jianyu & Lanchimba, Cintya, 2017. "The Choice of Exclusive Dealing: Economic Rationales and Evidence from French Retail Chains," Journal of Retailing, Elsevier, vol. 93(3), pages 317-335.
    13. Olivier De Groote & Frank Verboven, 2016. "Subsidies and myopia in technology adoption: evidence from solar photovoltaic systems," Working Papers of Department of Economics, Leuven 547933, KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven.
    14. José Luis Moraga-González & Zsolt Sándor & Matthijs R. Wildenbeest, 2015. "Consumer Search and Prices in the Automobile Market," Tinbergen Institute Discussion Papers 15-033/VII, Tinbergen Institute.
    15. De Groote, Olivier & Verboven, Frank, 2018. "Subsidies and Time Discounting in New Technology Adoption: Evidence from Solar Photovoltaic Systems," TSE Working Papers 18-957, Toulouse School of Economics (TSE).
    16. Raff, Horst & Schmitt, Nicolas, 2015. "Retailing and international trade: A survey of the literature," Economics Working Papers 2015-02, Christian-Albrechts-University of Kiel, Department of Economics.
    17. Wei-Min Hu & Junji Xiao & Xiaolan Zhou, 2014. "Collusion or Competition? Interfirm Relationships in the Chinese Auto Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 62(1), pages 1-40, March.
    18. Hiroshi Kitamura & Noriaki Matsushima & Misato Sato, 2021. "Defending home against giants: Exclusive dealing as a survival strategy for local firms," ISER Discussion Paper 1122, Institute of Social and Economic Research, Osaka University.
    19. Li, Shengyu & Luo, Rong, 2020. "Non-Exclusive Dealing with Retailer Differentiation and Market Penetration," International Journal of Industrial Organization, Elsevier, vol. 70(C).

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    More about this item

    JEL classification:

    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts
    • L62 - Industrial Organization - - Industry Studies: Manufacturing - - - Automobiles; Other Transportation Equipment; Related Parts and Equipment

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