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Product Differentiation and the Equilibrium Structure of the Manufacturer-Retailer Relationship

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  • Jerzy Mycielski
  • Yohanes Riyanto
  • Filip Wuyts

Abstract

In this paper, we analyse the manufacturers' choice of vertical arrangement with retailers. We focus on two types of vertical arrangements namely exclusive dealing and exclusive territory. Both are used by manufacturers as instruments to dampen manufacturer competition. Exclusive dealing is used to avoid a head-to-head competition with other brands within a retail outlet. Thus, it restricts interbrand competition. Exclusive territory is used to eliminate intrabrand competition. Our results show that the choice of vertical arrangement depends on the degree of product substitution. When products are less subsitutable, in other words the interbrand rivalry is weak, manufacturers prefer to sell the products to a large number of competitive retailers. When the interbrand rivalry is strong, exclusive territory with exclusive dealing might be adopted by manufacturers. We derive welfare and antitrust policy implications.

Suggested Citation

  • Jerzy Mycielski & Yohanes Riyanto & Filip Wuyts, 1998. "Product Differentiation and the Equilibrium Structure of the Manufacturer-Retailer Relationship," Working Papers of Department of Economics, Leuven ces9815, KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven.
    • Handle: RePEc:ete:ceswps:ces9815
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