On the efficiency of vertical territorial restraints
Abstract
Vertical restraints, which give producers a means of control over their independent distributors and reduce intra-brand competition, continue to divide economists. At issue: do these restraints enhance economic efficiency or stifle competition? Unlike any previous analysis, the model presented in this research combines the horizontal externality in pre-sale services, which is the core of the pro-competitive argument, with the strategic effect of exclusive territory. After a brief literature review in chapter one, the second chapter demonstrates that if pre-sales service elasticity of demand is high (low), exclusive territory stimulates (reduces) producers' competition. It results that the net effect on social welfare is positive when the elasticity is high, but it remains ambiguous when the elasticity is low. In the latter case, one needs to evaluate the anti-competitive effect of dampening inter-brand competition versus the pro-competitive effect of curbing the free-rider problem. The third chapter develops an empirical model to unearth whether restricting intra-brand competition has any positive effects on the supply of pre-sale services and/or limits inter-brand competition. The model is applied to the automotive industry that has undergone radical changes in retailing in the last decade. This work uses an index compiled from a new car buyers survey that indicates the level of customer satisfaction. This index serves as a measure of dealer pre-sales service. Taking into account the inherent endogeneity problem pertaining to the estimation of a simultaneous equations system, a two-stage least square estimation yields unexpected results. Although automobiles should probably fall in the complex good category, this dissertation finds no empirical evidence that pre-sales service affects consumer demand. Instead, the results show strong evidence that producers reduce their dealer network to lessen inter-brand competition. In sum, the empirical results are unambiguous: by restricting intra-brand competition car manufacturers manage to raise their price above non-cooperative equilibrium levels.
Recommended Citation
Benoit Durand,
"On the efficiency of vertical territorial restraints"
(January 1, 2000).
Boston College Dissertations and Theses.
Paper AAI9961587.
http://escholarship.bc.edu/dissertations/AAI9961587
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