Exclusive Territories and Manufacturers’ Collusion

Salvatore Piccolo () and Markus Reisinger ()
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Markus Reisinger: University of Munich

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: 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.

Keywords: Exclusive territories; supply chains; tacit collusion; information sharing; vertical restraints. (search for similar items in EconPapers)
Date: 2010-04-14, Revised 2011-02-22
New Economics Papers: this item is included in nep-bec and nep-com
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Citations: View citations in EconPapers (27)

Published in Management Science, 2011, Vol. 57, 1250-1266

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Journal Article: Exclusive Territories and Manufacturers' Collusion (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:sef:csefwp:249

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