The determinants of dealership structure: Empirical analysis of the Chinese auto market

This paper investigates the factors that affect manufacturers' decisions to grant local monopoly to a dealer and the factors that determine the dealer's status of sole dealership in the Chinese automobile market. Our empirical findings suggest that manufacturer decisions depend on dealers' retail network: manufacturers are inclined to choose a sole dealer for their brands if that dealer also has retail outlets for substitute brands in the local market and to choose multiple dealers otherwise. These findings can be explained by the theory proposed by [Mathewson, G. F., Winter, R. A., 1994. Territorial restrictions in franchise contracts. Economic Inquiry 32 (2), 181-192.], who suggest that manufacturers transfer the exclusive right of resale from themselves to dealers only if dealers' contribution is crucial to the vertical relationship. When dealers also have extensive retail channels for other brands, their retail efforts and experience become crucial to brand success, and thus manufacturers are more likely to offer them sole resale rights. Moreover, our empirical findings suggest that manufacturers also consider product quality and market conditions when making their decisions.