Exclusive distribution

economic-dictionary

Exclusive distribution is a commercial agreement between a producer and a distributor that establishes that the former will sell its products only to the latter if the latter agrees not to sell competing products.

Exclusive distribution can take different forms. One of the most used is that the retailer agrees to exclusively sell the product of a certain manufacturer, while the latter undertakes to use only this distributor as its sales channel.

Another alternative of this type of agreement, although less used, is that the distributor is forced to buy all the units of a certain product from its manufacturer.

The exclusive distribution agreement is not necessarily expressed in a formal, written contract. While this happens in many cases, in others it is only a verbal agreement between the parties.

Pro-competitive effect of exclusive distribution

There is a pro-competitive effect of exclusive distribution that is manifested in the facts:

  • It allows to better coordinate the activities of producers and sellers to provide a better service to customers and thus boost sales.
  • It allows distributors to concentrate their promotional and sales efforts on a single product, increasing competition between different brands.
  • Eliminate the risk of distributors taking advantage of the sales effort of others. Indeed, when there is no exclusivity, a distributor can invest in providing a good information service to the consumer, but this can go to buy from another distributor that offers a lower price because it does not offer any service (this is what is called a free-rider or stowaway of the sales effort that another makes).
  • It reduces the risk that the producer faces when he has to make specific investments to serve his customers.

Anti-competitive risk of exclusive distribution

However, there are also anti-competitive risks of exclusive distribution such as the following:

  • A dominant company may prevent its competitors from being able to sell its products through the most efficient distribution channels. Indeed, if the dominant company maintains exclusive contracts with most or all of the most relevant distributors in the market, its competitors will be at a disadvantage since they cannot distribute their products in the most profitable way.
  • A dominant company can increase the costs of its competitors when they see their sales reduced because they have a limited number of distribution channels. The lower level of sales prevents competitors from achieving economies of scale and, therefore, they face a cost disadvantage.

When there is exclusive distribution but competitors still have alternative (equally efficient) distribution channels, there is no competitive risk.

Types of distribution channels

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