Exclusive dealing contracts between manufacturers and retailers force new entrants to set up their own costly dealer networks to enter the market. We ask whether such contracts may act as an entry barrier, and provide an empirical analysis of the European car market. We …rst estimate a demand model with product and spatial di¤erentiation, and quantify the role of a dense distribution network in explaining the car manufacturers' market shares. We then perform policy counterfactuals to assess the pro…t incentives and entry-deterring e¤ects of exclusive dealing. We …nd that there are no individual incentives to maintain exclusive dealing, but there can be a collective incentive by the industry as a whole, even absent e¢ ciencies. Furthermore, a ban on exclusive dealing would shift market shares from the larger European …rms to the smaller entrants. More importantly, consumers would gain substantially, mainly because of the increased spatial availability and less so because of intensi…ed price competition. Our …ndings suggest that the European Commission's recent decision to facilitate exclusive dealing in the car market may not have been warranted.
Exclusive dealing contracts between manufacturers and retailers force new entrants to set up their own costly dealer networks to enter the market. We ask whether such contracts may act as an entry barrier, and provide an empirical analysis of the European car market. We …rst estimate a demand model with product and spatial di¤erentiation, and quantify the role of a dense distribution network in explaining the car manufacturers' market shares. We then perform policy counterfactuals to assess the pro…t incentives and entry-deterring e¤ects of exclusive dealing. We …nd that there are no individual incentives to maintain exclusive dealing, but there can be a collective incentive by the industry as a whole, even absent e¢ ciencies. Furthermore, a ban on exclusive dealing would shift market shares from the larger European …rms to the smaller entrants. More importantly, consumers would gain substantially, mainly because of the increased spatial availability and less so because of intensi…ed price competition. Our …ndings suggest that the European Commission's recent decision to facilitate exclusive dealing in the car market may not have been warranted.
This paper investigates the role of distribution networks in explaining incumbency advantages in the European car market. We compare three approaches to incorporate the size of distribution networks in discrete choice models of product di¤erentiation: as an extra product characteristic, as a new dimension of product di¤erentiation in a nested logit framework, or as a measure of the expected travel cost under a spatial Poisson distribution of locations. We obtain robust conclusions across all three approaches: distribution networks play an important role in explaining car producers'market shares, but they only appear to explain part of the bias towards domestic brands in the car market. We also report on an ongoing research project where we analyze the role of distribution networks at a much more detailed local market level, and investigate the speci…c role of exclusive dealing as a possible entry barrier.
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