Inter- and intrabrand competition and the manufacturer-retailer relationship

This paper analyses manufacturers' choice of vertical arrangement with retailers. We focus on two types of vertical arrangement; exclusive dealing and exclusive territory. Both are used by manufacturers as instruments to reduce competition between manufacturers. 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 substitutable, in other words, the interbrand rivalry is weak, manufacturers prefer to sell brands 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. (JEL: D 43, L 22, L 42).