Intrabrand spatial quantity competition and maximum retail price stipulations

Abstract

In this paper, we use a spatial competition model developed by Pal (1998) to analyze producer imposed retail price ceilings and producer assigned exclusive geographic sales territories. Two wholesale distributors are presumed to each have a single collection point respectively from which they supply retail outlets at many locations. Each wholesaler chooses the quantity to ship to each outlet and the retail prices attain market clearing levels. Given that the costs of shipping depend on distance, this system results in a kind of waste in that the products are not shipped exclusively from the nearest collection point. As pointed out by Matsumura (2002) this wasteful crosshauling can be prevented if the manufacturer assigns exclusive geographic territories to the distributors. But the costs of administering an exclusive territory system may well outweigh any savings in shipping costs. In this instance a manufacturer stipulated price ceiling may be the preferred alternative. By controlling not only the manufacturer price but also the retail priceat each location, the manufacturer can deter wasteful cross-hauling and expand the overall channel profit, while also conferring enlarged consumer surplus.