What is Exclusive Distribution?

Exclusive distribution is a situation in which only certain dealers are authorized to sell a specific product within a particular territory. The legality of an exclusive distribution agreement can vary depending on the specifics of the case. In some instances, such agreements are entirely legal, while in others, rivals may create legal challenges. If a firm can show that an exclusive distribution agreement harms competition in some way, it may be able to argue that the agreement is not legal.

This type of distribution agreement is usually seen with high end and luxury products. In an example of an exclusive distribution agreement, a car manufacturer might only agree to allow three dealers to sell its cars in a specific country. Dealers other than these three who attempted to sell new vehicles from that manufacturer would be doing so without authorization; one consequence of this might be that the manufacturer would refuse to honor warranties or provide support for cars sold at unauthorized dealers.

The structure of an exclusive distribution agreement favors both the manufacturer and the distributor or retailer. From the point of view of people moving the product to consumers, having an exclusive contract means that consumers must come to them if they want the product. For example, if a cell phone provider has an exclusive deal with a manufacturer of cell phones, people who want to use cell phones made by that manufacturer must go through that cell phone provider.

Manufacturers may appreciate having control over how their products are merchandized, marketed, and branded. Exclusive distribution allows companies to tightly control brand image, which can be especially important for luxury products. In fact, exclusive deals can add to brand image by reinforcing the idea that a product is special, rare, and difficult to obtain, thereby making it more desirable to consumers. If something can be bought at any store, it is viewed as mundane, whereas if it can only be bought at certain stores, this adds a scarcity component which can make it more appealing.

Exclusive distribution is often mentioned in product advertising. When an ad says something like “only available at the following stores” or provides a list of stores where a product can be purchased, it may indicate that the manufacturer has an exclusive agreement, and the product cannot be obtained elsewhere. This type of agreement tends to be less favorable for low end products, because the goal with such products is to saturate the market and move units quickly, something which would be hindered by limiting distribution sources.