Sole Distributors and Incentives to Innovate

Abstract

An independent firm that is the sole distributor of an upstream monopoly supplier has a stronger incentive to discover and adopt cost-reducing innovations than would a competitive distribution industry bound to the same upstream supplier. This is true whether the downstream pricing behavior is of a Cournot or Bertrand variety, and whether the distributors' rights to innovations are exclusive or may be costlessly imitated. This represents a new effi ciency-based explanation for the manufacturer's assignment of exclusive geographic territories to distributors. It can explain why a foreign manufacturer would designate a sole importer to be uniquely responsible for wholesale distribution of its product within the importing country.