Downstream horizontal integration and multiunit dealership

Abstract

In this paper, a game theoretical model featuring a manufacturer and two dealers has been proposed to investigate the belief that horizontal integration in an established network and granting of regional multiunit dealership in a growing network improve the manufacturer's profit. Some of the main results are as follows: (1) the manufacturer and dealers are mutually better off when integration and multiunit dealership lead to an increase in consumer demand through higher prices and better investments in services and national advertising, (2) downstream integration and multiunit dealership harm the manufacturer's profit when the integrated dealer aims to free-ride the manufacturer's brand or local service has no impact on consumer demand, (3) under certain conditions, both the manufacturer and dealers prefer downstream competition to integration regardless of whether it increases or reduces retail prices. Finally, mechanisms to implement horizontally integrated strategies in an established dealer network made of multiple single-unit dealers such as the use of resale price maintenance (RPM), exclusive territory agreement, and dealer cuts are discussed.