Vertical Restraints and the Law: Evidence from Automobile Franchising

After a 2002 European Commission 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 the use of exclusive territories was prohibited, they switched to alternative contractual devices to achieve this goal. The introduction of price ceilings despite free intrabrand competition also suggests that 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 locations. (c) 2009 by The University of Chicago. All rights reserved.