Vertical Restraints and the Law: Evidence from Automobile Franchising
Posted: 25 Sep 2008
Date Written: August 1, 2008
This paper shows that, after a 2002 European regulation prohibited the use of dealer exclusive territories, automobile franchise contracts in Italy introduced price ceilings and standards on verifiable marketing and service inputs, such as advertising and salespeople. The contracts also imposed quantity floors, a practice already in use before the regulatory change. The introduction of standards suggests that, consistent with a view of vertical restraints as coordination mechanisms, manufacturers used exclusive territories to induce desired dealer services and, once prohibited, switched to alternative contractual devices to achieve this goal. The introduction of price ceilings despite free intrabrand competition also suggests car manufacturers tried to prevent some dealers from "gaming" the quantity floors by selling to other dealers' customers, while charging monopolistic prices at their own location.
Keywords: Dealership Contracts, Freeriding, Regulatory Change, Vertical Restraints
JEL Classification: K21, L14, M21
Suggested Citation: Suggested Citation