Theoretical and empirical examination of exclusive territories in the malt beverage industry

The use of exclusive territories has long been controversial in the general public, the courts and the economic literature. This study attempts to address whether exclusive territories are appropriate in a unique setting, the malt beverage industry. In particular the theoretical model shows the use of exclusive territories as a means to correct an information problem that results when a wholesaler\u27s efforts at one retailer affect sales at second. The second retailer is unwilling to properly compensate the wholesaler for its effort when the other retailer is served by multiple wholesalers. Exclusive territories allow the second retailer to clearly see who is responsible for changes in effort that affect its sales. This theoretical model predicted higher quality and higher prices as a result of using exclusive territories. The model is then tested using store level data collected in 1999 and 2003 on price and quality from Indiana and Illinois. Until January 1, 2002, Indiana banned the use of exclusive territories in the malt beverage industry, while Illinois mandated them at the wholesale level. This allows for two types of tests. The first, a cross state test, using 1999 data, seemed to indicate beer was fresher, the measure of quality, but not more expensive in Illinois. The second test, using 2003 data to compare Indiana across time, there is an indication that exclusive territories has led to higher quality but not higher prices. The data collection allowed for another empirical investigation. Indiana bans the sale of cold beer for off-premise consumption at all licensed outlets except package goods stores. This practice lowers the transactions costs for consumers buying both cold and warm beer. The resulting theoretical prediction and empirical findings using the Indiana data are that cold beer will be more expensive than warm beer, and warm beer at package goods stores will be more expensive than at other outlets