Pricing Decisions in Franchised Chains: A Look at the Restaurant and Fast-Food Industry

This paper examines empirical issues of pricing and price dispersion within franchised restaurant and fast-food chains. Given the per se illegality of resale price maintenance (RPM) under current U.S. Antitrust laws, and the fact that franchised outlets are independent businesses under the law, franchisors must delegate the power to set prices to franchisees whereas corporate chains can control downstream prices directly. The issue I examine is whether it matters empirically who, between the franchisor or the franchisee, gets to choose downstream prices, and why. After discussing a number of reasons why prices chosen by franchisees may differ from those that a franchisor would pick, I show, using data from all restaurant chains in the metropolitan Pittsburgh and Detroit areas, that there is price dispersion in fast-food franchising. I then show that the amount of price dispersion relates to the amount of franchising in a way that suggests that 1) franchisors are not able to control franchisees' prices indirectly to the same extent that they control company-owned unit prices and 2) the prices in franchised and corporate units are systematically different. Finally, I show that prices are systematically lower in corporate restaurants. This suggests that the reason behind the price differentials is not franchisor opportunism, but more likely double marginalization or, potentially, the existence of positive horizontal externalities among restaurants in a chain.

The Role of Residual Claims and Self-Enforcement in Franchise Contracting

Much of the economic literature on franchising has been concerned with incentive issues and how these are managed in franchised contracts. Two main types of incentive mechanisms have been identified: residual claims and self enforcement. In this paper we describe these incentive mechanisms, and their use in franchise contracts. We argue that although these two types of mechanisms are usually thought of as alternative ways to align franchisee and franchisor incentives, they are in fact complementary in franchise contracts because they address different incentive problems. We explore what these incentive problems are, and then describe specifically how franchise contract terms and practices support each type of incentive mechanism. Finally, we discuss briefly, via two examples, how our analysis also applies to non-franchised systems with common marks or other reputation concerns.

Vertical Integration and Firm Boundaries : The Evidence

Understanding what determines firm boundaries and the choice between interacting in a firm or a market is not only the fundamental concern of the theory of the firm, but it is also one of the most important issues in economics. Data on value added, for example, reveal that in the US, transactions that occur in firms are roughly equal in value to those that occur in markets. The economics profession, however, has devoted much more attention to the workings of markets than to the study of firms, and even less attention to the interface between the two. Nevertheless, since Coase’s (1937) seminal paper on the subject, a rich set of theories has been developed that deal with firm boundaries in vertical or input/output structures. Furthermore, in the last 25 years, empirical evidence that can shed light on those theories has been accumulating.Vertical integration ; firm boundaries ; vertical mergers ; firms versus markets

Do Labor Market Rigidities have Microeconomic Effects? Evidence from Within the Firm

We investigate the microeconomic effects of labor regulations that protect employment and are expected to increase rigidity in labor markets. We exploit a unique outlet-level dataset obtained from a multinational food chain operating 2,525 similar retail outlets in 43 countries outside the United States. The dataset contains information on output, input costs and labor costs at a weekly frequency over several years, allowing us to examine the consequences of increased rigidity at a much more detailed level than has been possible with commonly available annual frequency or aggregate data. We find that higher levels of the index of labor market rigidity are associated with significantly lower output elasticity of labor demand, as well as significantly higher levels of hysteresis (measured as the elasticity of current labor costs with respect to the previous week's). Specifically, an increase of one standard deviation in the labor regulation rigidity index (1) reduces the response of labor cost to a one standard deviation increase in output (revenue) by about 4.5 percentage points (from 26.8 percent to 22.3 percent); and (2) increases the response of labor cost to a one standard deviation increase in lagged labor cost by about 9.6 percentage points (from 17.0 percent to 26.6 percent). Our estimates imply that the dampening factor (the ratio of actual to optimal labor adjustment) goes down by about 25 percent (from 0.68 to 0.50) for an increase in the index of labor regulation from its 25th to 75th percentile. Finally, we find evidence that the Company delayed entry and operates fewer outlets in countries with more rigid labor laws. Overall, the data imply a significant impact of labor laws on labor adjustment and related decisions at the micro levelhttp://deepblue.lib.umich.edu/bitstream/2027.42/49470/1/1069-Lafontaine.pdfhttp://deepblue.lib.umich.edu/bitstream/2027.42/49470/4/1069-Lafontaine_r_08_07.pdfhttp://deepblue.lib.umich.edu/bitstream/2027.42/49470/5/Microeconomic_Implications_of_Input_Market_Regulations.pd

Contracting in the Absence of Specific Investments and Moral Hazard: Understanding Carrier-Driver Relations in U.S. Trucking

This paper considers functions of contracting other than the protection of relationship-specific investments and the provision of marginal incentives, and applies the theory to explain variation in the form of compensation of over-the-road truck drivers in the U.S. Specifically, we argue that contracts in this industry serve to economize on the costs of price determination for heterogeneous transactions. We show that the actual terms of those contracts vary systematically with the nature of hauls in a way that is consistent with the theory. By contrast, we find that vehicle ownership, which defines a driver's status as an owner operator or company driver, depends on driver, but not trailer or haul, characteristics.

Too Far Away? The Effect of Distance to Headquarters on Business Establishment

In the population of over 1.7 million Texan sales-tax collecting business establishments, we show that greater distance to owner headquarters is associated with shorter establishment longevity. For the lodging industry, where we have revenue data, increases in distance to headquarters due to HQ-moving owners or acquisitions are associated with reductions in revenues per room. We argue that this detrimental distance effect is robust and causal, arising even when we control for the potential endogeneity of HQ distance using instrumental variable and matched pair analyses. We interpret this as evidence of monitoring and local information asymmetry problems for distant owners

Formula Pricing and Profit Sharing in Inter‐Firm Contracts

Peer Reviewedhttp://deepblue.lib.umich.edu/bitstream/2027.42/109908/1/mde2704.pd

The Deregulation of International Trucking in the European Union: Form and Effect

This paper examines how the deregulation of the international road transport industry in Western Europe has affected 1- the total quantity of cross-border road transport in the region; 2- the degree to which shippers outsource rather than integrate vertically their cross-border transport needs; and 3- the extent to which different countries participate in international road freight transport in Western Europe. Not surprisingly, we find that deregulation has had a large positive effect on the amount of international road transport net of the effect of the trade ties that grew over time among European Union countries. Moreover, consistent with the fact that the regulation disproportionately affected for-hire trucking, we find that deregulation has led shippers to shift toward more for-hire transport as opposed to own-account or private haulage. However, despite concerns voiced by member countries, we find no evidence that deregulation has disproportionately favored carriers of countries that were initially more (or less) intensively involved in international haulage