U.S. Department
of Justice
Promotional Effort Undertaken By Deaders Under Alternative Contractual Arrangements
| Figure 1 illustrates the Promotional Effort Undertaken by Dealers Under Alternative Contractutal Arrangements. At an optimum, dealers choose a level of Toyota promotion where the additional profitability of making a Toyota sale is equal to the marginal cost of promotional services divided by the increased marginal probability of a sale due to additional promotion. X-axis shows the quantity of promotional services: in increasing order, the no exclusive deal level (S subscript NE), the exclusive dealing level (S subscript ED) and the amount that would maximize the manfuacturer and dealer profits (S subscript MAX). Y-axis shows prices: in increasing order, the dealer profit difference between a Toyota and a Honda (M superscript D subscript T less M superscript D subscript H), the dealer 's profit margin from selling a Toyota (M superscript D subscript T), and the sum of the dealer's and manufacturer's profit from selling a Toyota(M superscript D subscript T less M superscript M subscript T) A convex function illustrating the promotional effort starts from the intersection of the x and y axes. When the dealer is not exclusive, the optimal no exclusive deal level of promotion (S subscript NE) corresponds to the dealer profit difference between a Toyota and a Honda (M superscript D subscript T less M superscript D subscript H). The exclusive dealing level (S subscript ED) of promotion corresponds to the dealer 's profit margin from selling a Toyota (M superscript D subscript T). The amount that maximizes the manfuacturer and dealer profits (S subscript MAX) corresponds to the sum of the dealer's and manufacturer's profit from selling a Toyota (M superscript D subscript T less M superscript M subscript T). The convex function illustrating the promotional effort goes through all these points. |