EXCLUSIVE DEALING, COMMON AGENCY, AND MULTIPRINCIPALS INCENTIVE THEORY

What are the costs and benefits of exclusive dealing and why do manufa cturers choose to organize their retailing markets in this way instead of taking a common retailer? This article traces back the benefits of this organizational form of distribution to the provision of incentiv es in a setting of competing manufacturer-retailer hierarchies under a dverse selection. It first develops a theoretical model that studies c ompetition between hierarchies under the assumption of secret wholesal e contracts. Second, if analyzes a game of choice of retailing channel s between rival manufacturers. Depending on the extent of the adverse selection problem and on the complementarity or substitutability of th eir brands, manufacturers prefer to use either a common or an exclusiv e retailer.