Politics has very little in common with non-coercive, voluntary exchange in the marketplace. Due to built-in symmetry, a joint lab does not always lead to the best performance. This paper analyses manufacturers' choice of vertical arrangement with retailers. Both are used by manufacturers as instruments to reduce competition between manufacturers. Thus, it restricts interbrand competition.
Exclusive territory is used to eliminate intrabrand competition.
Our results show that the choice of vertical arrangement depends on the degree of product substitution. When products are less substitutable, in other words, the interbrand rivalry is weak, manufacturers prefer to sell brands to a large number of competitive retailers. When the interbrand rivalry is strong, exclusive territory with exclusive dealing might be adopted by manufacturers. We derive welfare and antitrust policy implications. We examine the importance of agents' private information about their accident proneness and action, when the principal delegates via an optimal auction the undertaking of a risky activity to an agent.