The tradeoffs between retail service and exclusivity in distribution: Welfare and policy implications

This paper examines the welfare tradeoffs between retail service and exclusivity in distribution in a successive duopoly with differentiated retailers. A simple two-stage game is developed to model quantity and retail service competition under two situations, one where retailers operate under exclusivity and one where retailers can sell both products. It is shown that welfare is higher under exclusivity in distribution when the transfer price without exclusivity exceeds that under exclusivity and intra-product and in-store competition are intense. Our findings call for a detailed analysis of the antitrust treatment of exclusive dealing when interrelated with the provision of retail service and illustrate, for a class of examples, that more competition may be detrimental to welfare.