Measuring Cost Advantages from Exclusive Dealing An Empirical Study of Beer Distribution

Abstract

Exclusive dealing arrangements, in which a distributor contracts to work exclusively with a single manufacturer, can be efficiency enhancing or they can be an anticompetitive means to foreclose markets. Both rationales suggest a likely cost advantage to using exclusive distributors. This paper evaluates the effect of exclusive distribution arrangements on distributor costs in the Chicago beer market in 1994. I provide a model of consumer demand and firm behavior that incorporates industry details and allows for distribution through exclusive and shared channels. The parameters of the model are then estimated using existing scanner data on beer sales combined with a new data set on sales territories. The estimates provide evidence that brewers who employ exclusive dealing arrangements have lower cost distributors relative to their competitors. The magnitude of this cost advantage is estimated to be 14c/ per 12-oz beer, where the average 12-oz beer has a wholesale price of 50c/. When the sample is restricted to the major brewers in the Chicago market, exclusive distributors are estimated to confer an 8.8c/ cost advantage. A simple test indicates that foreclosure effects do not explain these results. Counterfactual experiments suggest that regulatory intervention in distribution arrangements could increase welfare measures by up to 42%, if exclusivity agreements merely foreclose parts of the market. Alternatively, if exclusive agreements are efficiency enhancing, intervention could decrease welfare measures by up to 21%. These estimates provide empirical evidence that intervention in exclusivity arrangements can yield large welfare dividends, provided that such intervention is not misapplied. Given that the foreclosure hypothesis is not supported by these data, in this market the most likely effect of intervention would be to substantially reduce social welfare.