Vertical Territorial Restrictions and Public Policy: Theories and Industry Evidence

Abstract

Territorial restrictions long have been the subject of intense policy debate. The central issue in this debate has been whether such distribution arrangements are deployed for efficiency or anticompetitive purposes. The authors add to the debate by broadening the existing conceptualization of business efficiency and providing evidence of the importance of efficiency considerations in the decision to deploy restrictions. In the past, efficiency often has been viewed narrowly, in terms of giving distributors incentives to provide free-rideable services. The authors show that information asymmetry and transaction costs also represent important efficiency-based explanations of territorial restrictions. With regard to anticompetitive concerns, their results show that manufacturers are more likely to use territorial restrictions when they face competition ex ante. Ultimately, this may reduce interbrand competition. From a public policy perspective, their pattern of results supports the current rule of reason treatment of territorial restrictions in the United States. At the same time it questions the current European policy of per se illegality.