Thursday, June 10, 2010
Posted by D. Danie Sokol
Salvatore Piccolo (University of Naples "Federico II" and CSEF) and Markus Reisinger (University of Munich) explain Exclusive Territories and Manufacturers’ Collusion.
ABSTRACT: This paper highlights the rationale for exclusive territories in a model of repeated interaction between competing supply chains. We show that exclusive territories have two countervailing effects on the incentives for manufacturers 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, in repeated interaction the punishment profit after deviation from the collusive agreement is 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 would prevent this instantaneous reaction’ mechanism. We show that the latter effect tends to dominate the former, whereby making exclusive territories a more sui! table organizational mode to sustain cooperation between manufacturers. We also argue that these effects emerge only if manufacturers engage in information sharing about wholesale contracts, and show that they indeed always choose to do so in equilibrium. Otherwise, the strategic effects are absent and exclusive territories are of no use. Thus, the paper provides insights on the way exclusive territories and information sharing between supply chains should be bundled to improve manufacturers’ profits.