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The Role of Exclusive Territories in Producers' Competition

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  • Patrick Rey
  • Joseph Stiglitz

Abstract

This article shows how vertical restraints, which affect intrabrand competition, can and will be used for reducing interbrand competition. Exclusive territories alter the perceived demand curve, making each producer believe he faces a less elastic demand curve, inducing an increase in the equilibrium price and producers' profits, even in the absence of franchise fees for recapturing retailers' rents. We analyze this strategic effect in a model that specifies the full range of feasible vertical contracts; thus we endogenize both whether exclusive contracts are employed and, if employed, the contract terms. Equilibria involve exclusive territories (with or without franchise fees), resulting in higher prices and profits but lower consumer surplus and total welfare.

Suggested Citation

  • 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.
    • Handle: RePEc:rje:randje:v:26:y:1995:i:autumn:p:431-451
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