Exclusive Dealing as a Barrier to Entry? Evidence from Automobiles

Abstract

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.

Consumer search in the U.S. auto industry: The role of dealership visits

“…We observe mobile device geolocation information that captures each consumer’s home location and dealership visits, i.e., individual-level offline search behavior unintrusively collected in real time. These unique data stand in contrast to previous literature on offline search that neither observes the number nor the order of searches – especially in the car market (e.g., Nurski and Verboven 2016 ; Murry and Zhou 2020 ). An exception is Moraga-Gonzalez et al ( 2018 ).…”

Consumer Search and Prices in the Automobile Market

“…Albuquerque and Bronnenberg (2012), using individual car transaction data in the San Diego metropolitan area between 2004 and 2006, find that consumers have a strong disutility for travel when buying a car. Similarly, Nurski and Verboven (2013) find that dealer proximity is an important determinant of demand for automobiles in Belgium. While these papers interpret distance as a transportation cost parameter that directly lowers utility, we treat it also as a variable that increases the cost of searching cars and creates limited and heterogeneous information.…”

“…For instance, Albuquerque and Bronnenberg (2012) use transaction level data as well as detailed data on the location of consumers and car dealers to estimate a model of supply and demand and find that consumers have a strong disutility of demand for travel. In a related paper, Nurski and Verboven (2013) focus on dealer networks to study whether the exclusive contracts often used in the European car market act as barrier to entry. The most important difference between these papers and our paper is that they assume consumers have perfect information about all the alternatives in the market.…”

“…If endogeneity of location were a serious issue then one would not expect to find a similar relation for the non-luxury brands. Nonetheless, the possible endogeneity of location can in principle be addressed by including a rich set of interactions between car characteristics and demographics (see also Nurski and Verboven, 2013 …”

Are environmental tax policies beneficial?

“…EUR 90 is considered a high-end estimate for the climate effects, given that the assumption on vehicle lifetime implies that effects only persist until 2022. 13  If the social costs and benefits of a quantified effect are uncertain, it can be prudent to apply a reasonable range, even if only econometric analysis would make it possible to establish the degree of confidence one could have in such an interval.…”