Few issues irk economists as monopolies and oligopolies, because they distort market mechanisms by limiting economic freedom and reducing competition, leading, in the process, to economy-wide inefficiencies.
Consumers too constantly complain about the conduct of “exclusive” agents or distributors of foreign companies.
Holders of exclusive agency agreements are of course keen to keep the practice and have consistently resisted any regulations that could reduce their hold on the market. Some argue that “exclusive” agencies do not restrict consumers’ choices, because a consumer could always go to the most efficient dealer. But that is a false argument. While it is true that consumers have a choice before making a purchase whether to buy from a particular agent or distributor, once they make the purchase they become beholden to them. Depending on how “exclusive” agents are, they can raise prices or delay repairs indefinitely. Despite numerous attempts of late by the Ministry of Trade and Industry to police the conduct of distributors and agents of foreign companies, problems have persisted.
The problem is in the nature of the contract itself. When a foreign company signs an exclusive deal with a distributor that gives him monopoly rights in a particular geographical area, sometimes the whole country, it disarms self-regulating market mechanisms. Such exclusive contracts remove competitive pressures from the market and take away the normal incentives for the distributor to provide good service and reasonable prices.
In many jurisdictions such exclusive contracts are still legal. In addition, foreign companies believe that it is to their advantage to partner with a local company that is more familiar with the terrain. Sometimes they are forced to do so for legal reasons, or pressured to enter into such agreements for other reasons.
Foreign manufactures may think that partnering with a local company gives them immediate access to local markets, instead of trying to do that on their own in a foreign environment.
I will argue here that for well-established brands, there is little to gain from entering into exclusive agency deals with local merchants. In many cases, the manufacturer may in fact lose because of the conduct of its local exclusive distributor. Have you noticed how certain brands thrive in a more competitive environment, but do poorly in markets where the manufacturer makes an exclusive deal with a local company that turns out not to be up to the task? This happens frequently, causing manufacturers to lose market share and reputation. Every now and them, foreign manufacturers switch from one exclusive dealer to another, creating messy conflicts with the original holder of the exclusive agreement.
Dealers for new brands have discovered how to make it in a market dominated by well-established competitors. They lower prices of new products, but make up for that by raising the costs of repairs and spare parts. Once they purchase the appliance or the car, consumers are held hostage to the dealers, because they control the supply of spare parts and in many cases high-level repairs.
Another argument frequently advanced by advocates of “exclusive” deals is post-sale services. According to this argument, you need volume and expertise to provide adequate maintenance and repair. However, there is no convincing evidence that monopoly over post-sale services improves the service. In New York City, where I lived for two decades, most well known brands had scores of authorized dealers and distributors, most of whom dealt with the mother company directly. Because of intense competition between these dealers, quality of service usually improves with time, as consumers could switch easily between dealers, who are required to honor the manufacturer’s warranty and make spare parts available as required.
The Ministry of Commerce and Industry has become more vigilant over the past few months, but more needs to be done. The ministry has to work within the legislative framework in place now, of course, but even under current regulations much can be done. For example, the speed with which recalls are made locally for defective cars and appliances. Another remedy would be to establish hot lines for consumers to contact the ministry directly with complaints about shoddy practices by dealers.
At the same time, the practice of exclusive agencies itself has to be reassessed. Saudi Arabia is no longer an unknown territory where foreign manufacturers have to rely on the influence of a single local company. They would do far better to create competition between dealers by giving the franchise to several or many companies, under the supervision of the manufacturer. Dealers who are not up to the task could be replaced easily with more competent dealers, without disrupting service to the consumer. Foreign manufacturers will do well to establish monitoring capacity within Saudi Arabia, to make sure that their dealers are providing adequate services.
