Can Exclusive Territories Limit Strategic Location Downstream

Research on spatial price discrimination demonstrates that strategic (off center) location choices by downstream firms can increase downstream profit and reduce both the profit of an upstream monopoly and social welfare. This paper examines exclusive territories as a vertical control mechanism and shows that such territories can force downstream firms to return to the center of the market. Yet, exclusive territories cannot completely eliminate the influence of strategic downstream location - the profit maximizing exclusive territories are either too small or too large to be socially efficient.