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The Role of Exclusive Territories in Producers' Competition

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  • Patrick Rey
  • Joseph Stiglitz

Abstract

The central objective of this paper is to show how vertical restraints, which affect intra-brand competition, can and will be used as an effective mechanism for reducing inter-brand competition and increasing producer profits. We show how exclusive territories alter the perceived demand curve, making each producer believe he faces a less elastic demand curve, thereby inducing an increase of the equilibrium price. The use of exclusive territories may increase producers' profits, even if the producers cannot charge franchise fees, and so cannot recapture, from the retailers, the monopoly rents they earn from their exclusive territory: we show that 'double marginalization' effects can be overcome by the strategic effect on producers' competition. We provide a model in which we can clearly specify the full range of feasible contracts between producers and retailers, and show that it is always a dominant strategy for firms to use exclusive territories (so that exclusive territories are used in equilibrium) and that the best situation from the producers' viewpoint may or may not entail franchise fees. In all cases, exclusive territories hurt consumer surplus and reduce total welfare, which yields a different light on vertical restraints from a competition policy perspective.

Suggested Citation

  • Patrick Rey & Joseph Stiglitz, 1994. "The Role of Exclusive Territories in Producers' Competition," NBER Working Papers 4618, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:4618
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    References listed on IDEAS

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    1. Rey, Patrick & Stiglitz, Joseph, 1988. "Vertical restraints and producers' competition," European Economic Review, Elsevier, vol. 32(2-3), pages 561-568, March.
    2. Timothy W. McGuire & Richard Staelin, 1983. "An Industry Equilibrium Analysis of Downstream Vertical Integration," Marketing Science, INFORMS, vol. 2(2), pages 161-191.
    3. 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.
    4. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June.
    5. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
    6. B. Douglas Bernheim & Michael D. Whinston, 1985. "Common Marketing Agency as a Device for Facilitating Collusion," RAND Journal of Economics, The RAND Corporation, vol. 16(2), pages 269-281, Summer.
    7. Bonanno, Giacomo & Vickers, John, 1988. "Vertical Separation," Journal of Industrial Economics, Wiley Blackwell, vol. 36(3), pages 257-265, March.
    8. Bernheim, B Douglas & Whinston, Michael D, 1986. "Common Agency," Econometrica, Econometric Society, vol. 54(4), pages 923-942, July.
    9. Vickers, John, 1985. "Delegation and the Theory of the Firm," Economic Journal, Royal Economic Society, vol. 95(380a), pages 138-147, Supplemen.
    10. Fershtman, Chaim & Judd, Kenneth L, 1987. "Equilibrium Incentives in Oligopoly," American Economic Review, American Economic Association, vol. 77(5), pages 927-940, December.
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    Cited by:

    1. Nocke, Volker & Rey, Patrick, 2014. "Exclusive Dealing and Vertical Integration in Interlocking Relationships," TSE Working Papers 14-515, Toulouse School of Economics (TSE), revised Jul 2017.
    2. Fiocco, Raffaele, 2016. "The strategic value of partial vertical integration," European Economic Review, Elsevier, vol. 89(C), pages 284-302.
    3. Kitamura, Hiroshi & Matsushima, Noriaki & Sato, Misato, 2018. "Exclusive contracts with complementary inputs," International Journal of Industrial Organization, Elsevier, vol. 56(C), pages 145-167.
    4. repec:oup:jcomle:v:1:y:2005:i:4:p:747-770. is not listed on IDEAS
    5. Hiroshi Kitamura & Noriaki Matsushima & Misato Sato, 2013. "How Does Downstream Firms' Efficiency Affect Exclusive Supply Agreements?," ISER Discussion Paper 0878r, Institute of Social and Economic Research, Osaka University, revised Sep 2015.
    6. repec:kap:revind:v:51:y:2017:i:2:d:10.1007_s11151-017-9588-6 is not listed on IDEAS
    7. 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.
    8. Patrick Rey & Thibaud Vergé, 2017. "Secret contracting in multilateral relations," Working Papers 2017-44, Center for Research in Economics and Statistics.
    9. Bogdan Genchev & Julie Holland Mortimer, 2016. "Empirical Evidence on Conditional Pricing Practices," Boston College Working Papers in Economics 908, Boston College Department of Economics.
    10. Aggey Semenov & Julian Wright, 2011. "Entry deterrrence via renegotiation-proof non-exclusive contracts," Working Papers 1105E, University of Ottawa, Department of Economics.
    11. Franz Wirl, 2015. "Downstream and upstream oligopolies when retailer’s effort matters," Journal of Economics, Springer, vol. 116(2), pages 99-127, October.
    12. Matthew Burgess & Lewis Evans, 2005. "Parallel Importation And Service Quality: An Empirical Investigation Of Competition Between Dvds And Cinemas In New Zealand," Journal of Competition Law and Economics, Oxford University Press, vol. 1(4), pages 747-770.
    13. Agamirova, Maria & Dzagurova, Natalia, 2014. "Incentives for cooperative-specific investments from court decisions to the theoretical analysis," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, pages 79-97.
    14. Salvatore Piccolo & Jeanine Miklós-Thal, 2012. "Colluding through suppliers," RAND Journal of Economics, RAND Corporation, vol. 43(3), pages 492-513, September.
    15. Federico Etro, 2010. "Endogenous Market Structures and Contract Theory," Working Papers 181, University of Milano-Bicocca, Department of Economics, revised Mar 2010.
    16. Bello, Alejandro & Contín-Pilart, Ignacio, 2012. "Taxes, cost and demand shifters as determinants in the regional gasoline price formation process: Evidence from Spain," Energy Policy, Elsevier, vol. 48(C), pages 439-448.
    17. repec:kap:jeczfn:v:121:y:2017:i:3:d:10.1007_s00712-017-0533-9 is not listed on IDEAS
    18. repec:kap:revind:v:51:y:2017:i:2:d:10.1007_s11151-017-9584-x is not listed on IDEAS
    19. repec:dpr:wpaper:0918 is not listed on IDEAS
    20. Aggey Semenov & Julian Wright, 2011. "Vertical Limit pricing," Working Papers 1104E, University of Ottawa, Department of Economics.
    21. Li, Jia & Moul, Charles C., 2015. "Who should handle retail? Vertical contracts, customer service, and social welfare in a Chinese mobile phone market," International Journal of Industrial Organization, Elsevier, vol. 39(C), pages 29-43.
    22. Barick Chung & Eric Rasmusen, 2008. "Price Discrimination between Retailers with and without Market Power," Working Papers 2008-14, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
    23. Serge Moresi & Marius Schwartz, 2015. "Strategic Incentives When Supplying to Rivals," Working Papers gueconwpa~15-15-05, Georgetown University, Department of Economics.
    24. Isabel Teichmann & Vanessa von Schlippenbach, 2014. "Collusive Effects of a Monopolist's Use of an Intermediary to Deliver to Retailers," Discussion Papers of DIW Berlin 1440, DIW Berlin, German Institute for Economic Research.

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