Price and non-price restraints when retailers are vertically differentiated

We consider an intrabrand competition model with a single manufacturer (M) and two vertically differentiated retailers. We show that when markets cannot be vertically segmented and the cost difference between the retailers is not too large, M will foreclose the low quality retailer. When markets can be vertically segmented, M will impose customer restrictions and assign consumers with low (high) willingness to pay to the low (high) quality retailer. This restriction benefits M and consumers with low willingness to pay (including some who are forced to switch to the low quality retailer), but harms consumers with high willingness to pay.