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 first estimate a demand model with product and spatial differentiation, and quantify consumers' valuations for dealer proximity and dealer exclusivity. We then perform policy counterfactuals to assess the profit incentives and possible entry-deterring effects of exclusive dealing. We find that there are no unilateral incentives to maintain exclusive dealing, but there is a collective incentive for the industry as a whole. Furthermore, a ban on exclusive dealing would raise the smaller entrants' market share. But more importantly, consumers would gain, not so much because of increased price competition, but rather because of the increased spatial availability, which compensates for the demand inefficiency from a loss of dealer exclusivity.