The Role and Extent of Economic Rent in Distribution Contracts.

Abstract

This dissertation is composed of five chapters that investigate the extent and role of economic rent in distribution contracts between manufacturers and dealers. Manufacturers often devise contractual mechanisms that enable downstream dealers to earn economic rent. One such mechanism is the two-stage ordering process with quantity discounts used by MNCs and local enterprises operating in China and elsewhere. Chapter 2 shows how, in theory, this ordering process enables manufacturers to determine indirectly the outcomes of downstream competition to be either Bertrand or Cournot, which in turn affects the economic rent earned by their dealers. In Chapter 3, I match the results of my theoretical model to the longitudinal data obtained from a leading Chinese manufacturer of a key computer accessory. I use the data to estimate unobserved final prices and thus the economic rent earned by each of its sixty dealers over a one-year period. I show empirically that the two-stage ordering process of this manufacturer leaves economic rent with its heterogeneous group of dealers. Chapter 4 looks at the role of economic rent, in conjunction with manufacturer’s supervisory effort, in enforcing desired yet non-contractible dealer marketing effort. Based on the institutional arrangements adopted by the computer accessory manufacturer, I find that the size of downstream economic rent and the manufacturer’s supervision intensity are used as complementary control instruments to induce non-contractible dealer marketing effort.