Networks of manufacturers and retailers

We study the endogenous formation of networks between manufacturers of differentiated goods and multi-product retailers. We find that, under both types of contracts (linear and two-part tariffs), only three distribution networks are stable for particular values of the degree of product differentiation and link costs: the non-exclusive distribution and non-exclusive dealing network, the exclusive distribution and exclusive dealing network, and a mixed distribution network in which both exclusive and non-exclusive relations are observed. Moreover, the stability of the first two networks is robust to the case of manufacturers with no bargaining power and the case of differentiated retailers who compete in prices. We show that, under both types of contracts, the distribution networks that maximize social welfare are not necessarily stable. Thus, a conflict between stability and social welfare is likely to occur, even more if the degree of product differentiation is low enough.

Research highlights▶ We study the formation of networks between manufacturers of differentiated goods and multi-product retailers. ▶ Only three distribution networks are possibly stable. ▶ Stability is robust to the case of differentiated retailers who compete in prices. ▶ The distribution networks that maximize social welfare are not necessarily stable. ▶ Conflict between stability and welfare will arise when product differentiation is low.