Incumbency advantages, distribution networks and exclusivity — Evidence from the European car markets

Abstract

This paper investigates the role of distribution networks in explaining incumbency advantages in the European car market. We compare three approaches to incorporate the size of distribution networks in discrete choice models of product differentiation: as an extra product characteristic, as a new dimension of product differentiation in a nested logit framework, or as a measure of the expected travel cost under a spatial Poisson distribution of locations. We obtain robust conclusions across all three approaches: distribution networks play an important role in explaining car producers' market shares, but they only appear to explain part of the bias towards domestic brands in the car market. We also report on an ongoing research project where we analyze the role of distribution networks at a much more detailed local market level, and investigate the specific role of exclusive dealing as a possible entry barrier.