Dual distribution is a situation where a manufacturer decides to distribute their products directly (using their own distributors) and, at the same time, hire independent distributors (who have no ownership relationship with the manufacturer).
Dual distribution derives its name from the fact that two means of distribution are used simultaneously: one of its own and one contracted.
It is then a mixture of the two basic distribution options that a manufacturer has. One is to integrate vertically and assume all distribution activities until reaching the final consumer , and the other is to outsource these activities and pay others to carry them out.
Although the choice of a dual distribution is perfectly legal, in some cases it raises concerns of a competitive nature. Indeed, in the dual distribution, the manufacturer competes at two levels:
- At the manufacturer level:Compete with other companies that manufacture products that are possible substitutes.
- At distribution level:Compete with independent distributors in the sale of their own products.
It is at this last level that there is a risk of limiting competition when the manufacturer imposes restrictions (for example, minimum prices or other conditions of sale) on its independent distributors.
Notwithstanding the foregoing, the competitive relationship between distributors is not entirely clear and has often confused competition authorities . On the one hand, when the manufacturer only uses external distributors, it can impose certain restrictions without major problems. However, when you decide to include your own distributors, the same restrictions can be classified as illegal.
To achieve a consistent analysis, competition authorities must look at the incentives that support the choice of the distributor. Next, we review some of the main analysis arguments:
- In general, dual distribution does not increase the market powerof a manufacturer. In other words, it would not be useful to be able to increase prices and gain more margin since any price increase at the retail level could also be made at the production level.
- Having your own distributors could increase efficiency in the event that independent distributors focus on areas where it is more difficult for the manufacturer to arrive without help.
- Own distributors can help collect relevant information and control the behavior of independents.
- The rational thing is that the manufacturer seeks to make its distribution system as efficient as possible and not to increase its costs.
In addition, it is important to see the degree of competition in the manufacturer’s market. If you face many competitors, you will not be able to increase prices with dual distribution. In any case, any competitive analysis of the dual distribution must be performed individually.