Exclusive Territories and Manufacturers' Collusion

15 Pages Posted: 22 Feb 2011 Last revised: 27 May 2011

See all articles by Salvatore Piccolo

Salvatore Piccolo

Catholic University of the Sacred Heart of Milan

Markus Reisinger

Frankfurt School of Finance & Management - Economics Department; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: February 21, 2011

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 softens 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 adjust their prices to the wholesale contract offered by a deviant manufacturer, whereas intrabrand competition prevents such `instantaneous reaction'. We show that the latter effect tends to dominate, thereby making exclusive territories a more suitable organizational mode to cooperate. These insights are robust to endogenous communication between manufacturers. We also consider retailers' service investments. Here, a novel effect emerges that softens the procollusive value of exclusive territories: Retailers of a deviant manufacturer increase investments, which renders deviation more profitable.

Keywords: Exclusive Territories, Supply Chains, Tacit Collusion, Information Sharing, Vertical Restraints

Suggested Citation

Piccolo, Salvatore and Reisinger, Markus, Exclusive Territories and Manufacturers' Collusion (February 21, 2011). Available at SSRN: https://ssrn.com/abstract=1767310 or http://dx.doi.org/10.2139/ssrn.1767310

Salvatore Piccolo

Catholic University of the Sacred Heart of Milan ( email )

Largo Gemelli, 1
Via Necchi 9
Milan, MI 20123
Italy

Markus Reisinger (Contact Author)

Frankfurt School of Finance & Management - Economics Department ( email )

Sonnemannstra├če 9-11
Frankfurt am Main, 60314
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Register to save articles to
your library

Register

Paper statistics

Downloads
54
Abstract Views
336
rank
373,087
PlumX Metrics