Issue: Autumn 1995
Pages: pp. 431-451
Authors: Patrick Rey and Joseph Stiglitz
Title: The Role of Exclusive Territories in Producers' Competition
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.
Market Structure, Firm Strategy, and Market Performance:
Oligopoly and Other Imperfect Markets; Monopolistic Competition; Contestable Markets (L130)
Firm Organization and Market Structure: Markets vs. Hierarchies; Vertical Integration (L220)
Microeconomics Theory of Firm and Industry under Imperfectly Competitive Market Structures (0226)
Market Structure: Industrial Organization and Corporate Strategy (6110)