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Exclusive Territories and Manufacturers’ Collusion

This paper highlights the rationale for exclusive territories in a model of repeated interaction between competing supply chains. We show that with observable contracts exclusive territories have two countervailing effects on manufacturers' incentives to sustain tacit collusion. First, granting local monopolies to retailers distributing a given brand softens inter- and intrabrand competition in a one-shot game. Hence, punishment profits are larger, thereby rendering deviation more profitable. Second, exclusive territories stifle deviation profits because retailers of competing brands can adjust their pricing decisions to the wholesale contract offered by a deviant manufacturer, whilst intrabrand competition prevents such `instantaneous reaction'. We show that the latter effect tends to dominate the former, whereby making exclusive territories a more suitable organizational mode to sustain upstream cooperation. These insights carry over when manufacturers voluntarily decide whether to disclose contracts and can change the distribution mode every period; moreover, they strengthen under imperfect intrabrand competition. Finally, we extend the model to allow for retailers' service investments. Here a novel effect emerges under exclusive territories: a retailer of the deviant manufacturer increases its service investment as a response to a lower wholesale price. This renders deviation more profitable, thereby softening the pro-collusive effect of exclusive territories.

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Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 249.

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Date of creation: 14 Apr 2010
Date of revision: 22 Feb 2011
Publication status: Published in Management Science, 2011, Vol. 57, 1250-1266
Handle: RePEc:sef:csefwp:249
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