A Model of Vertical Restriction and Equilibrium in Retailing

Abstract

This model of distribution provides a rationale for restrictions placed on retailers by manufacturers. The manufacturer's customers are located uniformly along a road, and retailing operations are subject to increasing returns. Three difficulties arise. First, retailers acting in concert can earn positive profits at the expense of the manufacturer and consumers. Second, costless relocation, free entry, and competition will not result in the store density and retail price favored by the manufacturer. Third, store locations fixed in the short run imply that price cutting would undermine the density of stores preferred by the manufacturer.