The logic of exclusive territories
Massimo Motta (ICREA-Universitat Pompeu Fabra and Barcelona GSE)

Our paper revisits the rationale for exclusive territories in an (intra-brand) vertical environment where there is uncertainty and public observability of contracts. We assume that when the manufacturer decides whether she wants retailers to compete or to have exclusive territories, when (two-part tariffs) contract terms are publicly posted, and when retailers take investment decisions (in the configurations where we consider retailers’ investments), there is uncertainty about some shocks which affect the productivity of retailers. Shocks are realised only before retailers decide how much of the input to order and produce. Our main result is that the uncertainty created by retailers’ competition matters, and affects the optimal distribution system. When retailers are extremely risk averse, in a distribution system where they compete they would ask for a high risk premium: unless their shocks are perfectly correlated, they have to be compensated for the risk of having to compete with a high productivity rival retailer. Further, when they can invest in retail services, competition uncertainty reduces their incentives to invest. Exclusive territories, by eliminating the uncertainty created by competition, allows the manufacturer to save the risk premium and to increase incentives to invest.This result formalises the traditional argument that ET is adopted to protect retailers’ investments in services. However, notice that the result is not due to the lack of appropriability of the investment, as usually argued (in fact, for given levels of uncertainty the higher the spillovers the more desirable to avoid ET). Rather, it is due to the fact that by insulating retailers from competition, ET reduces the risks associated with investments and promotes them. We consider different versions of this basic model, for instance by considering cases where retailers’ shocks are perfectly correlated v. independently distributed; where shocks remain private information v. are publicly observed; where investments can be perfectly appropriated by retailers v. there exist spillovers; where firms compete in quantities v. in prices.
(joint with Stephen Hansen (UPF and BarcelonaGSE)).

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Legal Principles in Antitrust Enforcement
Evgenia Motchenkova (VU University Amsterdam)

We study antitrust enforcement in which the fine must obey four legal principles: punishments should fit the crime, proportionality, bankruptcy considerations, and minimum fines. We integrate these legal principles into an infinitely-repeated oligopoly model, where bankruptcy considerations ensure abnormal cartel profits. We derive the optimal fine schedule that achieves maximal social welfare under these legal principles. This optimal fine schedule induces collusion on a lower price by making it more attractive than collusion on higher prices. Also, raising minimum fines reduces social welfare and should never be implemented. Our analysis and results relate to the marginal deterrence literature.
(joint with Harold Houba (VU) and Quan Wen (Vanderbilt University).

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