The Role of Exclusive Territories in Producers' Competition

Abstract

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. This article shows how vertical restraints, which affect intrabrand competition, can and will be used for reducing interbrand competition. Exclusive territories alter the perceived demand curve, making each producer believe he faces a less elastic demand curve, inducing an increase in the equilibrium price and producers' profits, even in the absence offranchise fees for recapturing retailers' rents. We analyze this strategic effect in a model that specifies the full range of feasible vertical contracts; thus we endogenize both whether exclusive contracts are employed and, if employed, the con-tract terms. Equilibria involve exclusive territories (with or without franchise fees), resulting in higher prices and profits but lower consumer surplus and total welfare.