Working Paper: CEPR ID: DP8762
Authors: Laura Nurski; Frank Verboven
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 first estimate a demand model with product and spatial differentiation, and quantify the role of a dense distribution network in explaining the car manufacturers' market shares. We then perform policy counterfactuals to assess the profit incentives and entry-deterring effects of exclusive dealing. We find 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 efficiencies. Furthermore, a ban on exclusive dealing would shift market shares from the larger European firms to the smaller entrants. More importantly, consumers would gain substantially, mainly because of the increased spatial availability and less so because of intensified price competition. Our findings suggest that the European Commission's recent decision to facilitate exclusive dealing in the car market may not have been warranted.
Keywords: automotive industry; exclusive dealing; foreclosure; vertical restraints
JEL Codes: L14; L42; L62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| exclusive dealing contracts between manufacturers and retailers (L14) | barrier to entry for new entrants (D43) |
| exclusive dealing (L14) | entry barrier (D43) |
| collective incentive among the industry (L19) | foreclosure of entry (G33) |
| a ban on exclusive dealing (L42) | shift market shares from larger European firms to smaller entrants (F12) |
| increased spatial availability (R22) | substantial consumer gains (D11) |
| European Commission's decision to facilitate exclusive dealing (L42) | contradiction to findings (D91) |