how do cartels use vertical restraints reflections on bork s the antitrust paradox abstractin the antitrust paradox robert bork discusses vertical restraints and policy responses to naked and ancillary price fixing empirical research finds that vertical restraints are generally welfare enhancing we examine cartels that used vertical restraints to support collusion we find that one quarter of a sample of convicted contemporary international cartels used vertical restraints some of these cartels used vertical restraints to control downstream firms who might otherwise have undermined collusion in other cases distributors themselves had market power and received a share of cartel rents in return for their willingness to exercise that power as part of a cartel this raises questions for antitrust policy toward vertical restraints in highly concentrated industries or in those with a history of cartel activity

the pricing of durable exhaustible resources partial or total durability characterizes a large class of exhaustible resources hotelling s r percent rule will apply to a durable resource produced in a competitive market but will not apply if the resource is produced in a monopolistic market however the r percent rule does not mean that price is steadily rising it is shown that in general the competitive market price will fall initially as the stock in circulation increases and later will rise as the stock decreases and eventually depreciates toward zero after production ceases accounting for durability may thus help explain the u shaped long term price profiles observed for many resources 11 references 3 figures

exhaustible resource allocation in an overlapping generations economy abstract this paper analyzes competitive allocations of an exhaustible resource in an overlapping generations economy conditions are given for the existence of equilibrium extraction rules such that both extraction and investment in future stocks are increasing and continuous in the current stock the paper then considers the time paths of equilibrium allocations and shows that there are economies where equilibrium resource extractions and prices exhibit nonclassical behavior this is illustrated through a finite horizon example in which extractions increase and prices decrease over the entire time horizon and an infinite horizon example where there are persistent cycles in extractions and prices and multiple equilibria the paper concludes by examining welfare issues

intangible capital market share and corporate strategy this paper theoretically and empirically identifies the determinants of firm profitability and market share for twelve broadly defined us manufacturing industry groups the effects of advertising research and development and diversification on profitability and market share are econometrically tested for each industry group and corporate strategy implications of the results are considered one major result of the analysis is that research and development r d tends to be much more effective as a means of enhancing firm profitability than advertising and research and development spending decisions are more closely related to the profitability of r d than advertising decisions are related to the profitability of advertising

balancing the carbon budget for oil the distributive effects of alternative policies keeping temperature change below 2 c will require leaving large reserves of fossil fuels unextracted we assess alternative policies to achieve this goal in a world divided into two regions one regulated with emissions pricing and one unregulated supplied by multiple resource pools with different extraction costs and a carbon free backstop whose costs decline over time global emissions can be reduced by combinations of three policies 1 increasing the size of the regulated coalition 2 raising the tax or tightening the cap within the regulated coalition and 3 accelerating cost reductions of the clean technology we ask how combinations achieving the same cumulative co2 emissions the carbon budget affect the discounted surplus of regulated and unregulated consumers and the wealth of the extractors we first evaluate these policy alternatives in a two pool theoretical model with high and low cost extractors and once tradeoffs are illuminated in a calibrated oil market model a global co2 tax is both cost effective and the best policy for regulated consumers extractors and unregulated consumers however prefer a technology only policy when the regulating coalition is subglobal support for the clean substitute is desired and often required but the preferred policy portfolio of the coalition involves a tighter cap and less technology policy than is globally optimal leaving room for bargaining over who pays for clean innovation

the effects of different contractual arrangements the case of retail gasoline markets the change in the contractual arrangement at a gasoline station from a refiner controlled to a franchise operation implies different incentives for the individual who sets prices and determines hours but reflects no change in the product nor the market environment the outcome can lead to higher prices and reduced hours at the station affected the divorcement experience in maryland illustrates how change can be imposed by the legal system average self service and full serve prices rose and hours of operation fell relative to those of competitors even though refiner operations that were forced to franchise had previously had prices below the competition the evidence of an effect on the prices and hours of competitors is less convincing 16 references 2 tables

the concept of natural capital the natural environment is now commonly viewed as a form of capital asset or natural capital also included are ecosystems that provide important goods and services to the economy managing natural capital has consequences for sustainable development however there are contrasting weak versus strong sustainability views which in turn have implications for green accounting natural resource based sovereign wealth funds have emerged as key financial instruments for compensating resource depreciation with greater economy wide investments recent scientific evidence recommends demarcating safe operating spaces to limit exploitation of critical global biophysical subsystems or processes these challenges suggest that the concept of natural capital is pivotal to sound policy

applications barriers to entry and exclusive vertical contracts in platform markets i introduction exclusive contracts in vertical relationships feature prominently in antitrust cases in network industries at issue are contracts a firm with market power signs with its suppliers or buyers that may limit access to the market by its rivals we focus on the case in which the firm signs exclusive contracts with upstream suppliers for example in the 1980s developers of games for nintendo s video game console agreed not to provide any titles for other platforms atari v nintendo 1 in u s v microsoft the dominant software provider was charged with abusing its monopoly power in its contracts with internet content providers and independent software developers with the goal of excluding competitors to microsoft s internet explorer browser 2 exclusive contracts such as these are an example of vertical restraints an area in law and economics that has generated as much controversy as any we examine the impacts of exclusionary contracts between hardware manufacturers and software providers in the home video game market an important feature of the market for video game consoles is indirect network effects katz and shapiro 1985 whereby the consumer valuation of the primary product the console or platform increases with the number of complementary goods available gaming software if platform providers enjoy indirect network effects then each may want to prevent suppliers of its complementary good from also supplying competing platforms evans 2003 regibeau 2004 when a dominant platform provider and the producers of the complementary goods sign such exclusionary contracts they burden competing platforms and potential challengers with producing the complementary goods themselves or finding alternative suppliers which may raise rivals costs and can diminish competition brennan 2007 this is the applications barrier to entry at issue in the microsoft case foreclosure of competitors can result armstrong and wright 2007 whether survival of a single dominant platform is inefficient or to the detriment of consumers depends on the size of duplicated costs among platforms the heterogeneity of consumers preferences among platforms and among the complementary goods and other factors we focus on estimating determining the causes of and exploring the implications of indirect network effects for exclusively and nonexclusively provided games exclusive titles are those games that can only be played on one system because the console producer either created the game itself or negotiated an exclusive contract with a video game maker we examine the sixth generation videogame console market which comprises nintendo s gamecube sony s playstation2 and microsoft s xbox and uncover an interesting finding although we find strong indirect network effects and a large impact of exclusivity on rivals console demand when most games are nonexclusive the marginal exclusive game contributes virtually nothing to console demand exclusivity helps a firm establish market share at first but beyond a certain point additional locking up of software supply no longer hurts rivals consequently there is no ability to capture ever more console consumers through locking in an increasing supply of exclusive games such capture of the whole market is often assumed in discussion or derived in theoretical models of the video game industry in specific or platform markets in general by itself a finding that exclusivity does not affect console demand on the margin does not necessarily imply that there is no consumer harm for with heterogeneous game quality it may be that a console maker need only lock in the best games to harm the rivals ability to compete however our investigation suggests that exclusionary contracts did not hurt consumers because of two important features of the videogame market the bargaining power enjoyed by the best software providers coupled with the existence of blockbuster games that enable competitors to establish market share prevents the foreclosure of rivals through exclusive contracting suggested by some models armstrong and wright 2007

is hotelling s rule relevant to domestic oil production a model of oil supply from known reserves is developed to incorporate geological and engineering principles in the oil field operator s decision problem oil production from existing wells within an oil field is isolated from the drilling of new wells the geo engineering

vertical antitrust policy as a problem of inference the legality of nonprice vertical practices in the u s is determined by their likely competitive effects an optimal enforcement rule combines evidence with theory to update prior beliefs and specifies a decision that minimizes the expected loss because the welfare effects of vertical practices are theoretically ambiguous optimal decisions depend heavily on prior beliefs which should be guided by empirical evidence empirically vertical restraints appear to reduce price and or increase output thus absent a good natural experiment to evaluate a particular restraint s effect an optimal policy places a heavy burden on plaintiffs to show that a restraint is anticompetitive

vertical integration market foreclosure and consumer welfare in the cable television industry i examine the effects of vertical integration between programming and distribution in the cable television industry i assess the effects of ownership structure on program offerings prices and subscriptions and i compare consumer welfare across integrated and unintegrated markets the results of this analysis suggest two general conclusions first integrated operators tend to exclude rival program services suggesting that certain program services cannot gain access to the distribution networks of vertically integrated cable system operators second vertical integration does not harm and may actually benefit consumers because of the associated efficiency gains

tying as a response to demand uncertainty this article examines requirements tying of a competitively supplied good to a monopolized good it expands the set of market conditions in which this instrument is known to be profitable with heterogeneous privately informed buyers a firm can profit by tying two goods even when demands for the goods are price independent providing the demands are stochastically dependent we investigate the profitability of tying as a response to stochastic demand as well as the effects of tying on prices and the extent of the market served

the role of exclusive territories in producers competition reprinted in cartels stephen salant ed the international library of critical writings in economics edward elgar reference collections

vertical separation increases gasoline prices i introduction the choice and implications of firm structure remain central questions in industrial economics and for good reason analysis of recent u s census data suggests that within firm transactions now create the same amount of value as those between firms lafontaine and slade 2007 however despite a rich literature describing the potential trade offs involved in choosing between integration and separation little is understood about the consequences of a change in form when both are commonly used in an industry in large part this reflects the difficulty of estimating the marginal impact of an organizational form as its usage is likely driven by many of the same factors determining economic outcomes i add to the literature by estimating the marginal impact of vertical separation in retail gasoline markets where stakeholders have long been skeptical about integrated organizational forms some states have even limited refiner ownership of retail outlets despite an economics literature suggesting that such integration can lower prices by better aligning all parties incentives cooper et al 2005 vita 2000 to account for concern about the endogeneity of form i use panel data methods as well as an instrumental variables iv strategy the combination of the two approaches produces estimates robust to the presence of time invariant and time varying factors that simultaneously influence the choice of form and economic outcomes after accounting for the endogeneity of form i find that switching a station to a vertically separated form increases gasoline prices by amounts equal to 25 45 of the average retail margin these price effect estimates are slightly smaller in magnitude than the results in papers using statewide policy changes to identify the impact of organizational form barron and umbeck 1984 vita 2000 this difference makes sense given the distinct estimation strategies in this paper i identify the impact of form at marginal stations where the refiner is fundamentally indifferent between forms in contrast using policy changes to identify the marginal effect of form conflates marginal stations with inframarginal ones where a freely optimizing refiner would never choose to vertically separate thus one might expect papers using policy changes to overstate the marginal impact of form while accurately estimating the consequences of adopting a law prohibiting a form similarly estimates of the marginal effect of form will not necessarily accurately predict the consequences of a sweeping policy change interestingly i do not find that vertical separation has a statistically significant impact on overall fuel sales i interpret this as indicating that the high powered incentives given to local agents at vertically separated stations induce greater effort to increase local demand this can explain the apparently contradictory result of observing increased prices but not lower sales quantities moreover it is consistent with past theoretical models of vertical separation in gasoline retailing slade 1996 as well as anecdotal impressions of refiners organizational strategies kleit 2005 overall my paper contributes to two different literatures first it adds to a small but growing group of papers that disentangle the effect of form choice from the elements impacting the choice of form the papers in this literature suggest that separation can have widely varying consequences for example novak and stem 2008 find that vertical separation induces a trade off between initial performance and improvement in the automobile industry while forbes and lederman 2010 show that vertically integrated regional airlines are better at minimizing delays and cancellations in contrast kosova et al 2013 find no observable difference in outcomes across organizational forms for hotels associated with a large brand owner the different findings in our respective papers suggest that vertical separation induces local agents to exert effort in different ways in the two industries we examine

product quality product price and share dynamics in the german compact car market the present paper examines one of the central elements of evolutionary thinking the replicator dynamics mechanism using data on product characteristics of automobiles sold on the german domestic market over the period 2001 2006 we construct a fitness variable for each car model applying non parametric efficiency measurement techniques better known as data envelopment analysis dea the basic question we intend to answer is whether cars providing a higher quality price ratio for consumers tend to increase their market share compared to variants with lower quality price ratio for consumers the relationship between a car models fitness and its market performance is empirically tested in a regression framework the results show that the principle of growth of the fitter is working as suggested by evolutionary theory in particular we find that car models with considerably lower fitness than the market average lose whereas models with above average fitness gain additional market shares

the competitive effects of resale price maintenance the competitive effects of resale price maintenance rpm are theoretically diverse rpm can cause allocation distortions or promote productive efficiencies in the distribution process moreover extant cross sectional empirical evidence is incapable of distinguishing among the potentially disparate effects of rpm this paper conducts hypothesis tests of the alternative theories of rpm the empirical framework relates estimates of the effects of rpm for a cross section of observations to necessary conditions of the alternative models this analysis indicates that rpm is used both to foster cartels and promote efficiencies in the distribution process this result is consistent with the growing body of case study analysis that suggests that rpm is used for a variety of reasons this result also questions the current per se illegal status of rpm in the antitrust laws evidence is also provided concerning the strategic interaction between manufacturers and dealers in the distribution process and the use of financial data in analyzing propositions in industrial organization

on the portents of peak oil and other indicators of resource scarcity economists have studied various indicators of resource scarcity but largely ignored the phenomenon of peaking due to its connection to non economic physical theories of resource exhaustion i consider peaking from the economic point of view where economic forces determine the shape of the equilibrium extraction path within that framework i ask whether the timing of peak production reveals anything useful about scarcity i find peaking to be an ambiguous indicator if someone announced the peak would arrive earlier than expected and you believed them you would not know whether the news was good or bad however i also show that the traditional economic indicators of resource scarcity price cost and rent fare no better and argue that previous studies have misconstrued the connection between changes in underlying scarcity and movements in these traditional indicators

bundling as an entry barrier in this paper we look at the case for bundling in an oligopolistic environment we show that bundling is a particularly effective entry deterrent strategy a company that has market power in two goods a and b can by bundling them together make it harder for a rival with only one of these goods to enter the market bundling allows an incumbent to credibly defend both products without having to price low in each the traditional explanation for bundling that economists have given is that it serves as an effective tool of price discrimination by a monopolist although price discrimination provides a reason to bundle the gains are small compared with the gains from the entry deterrent effect i introduction in this paper we look at the case for bundling in an oligopolistic environment we show that bundling is a particularly effective entry deterrent strategy a company that has market power in two goods a and b can by bundling them together make it harder for a rival with only one of these goods to enter the market bundling allows an incumbent to defend both products without having to price low in each while it is still possible to compete by offering a rival bundle a monopolist can significantly lower the potential profits of a one product entrant without having to engage in limit pricing prior to entry we also show that bundling continues to be an effective pricing tool even if entry deterrence fails or if there is already an existing one product rival a company with a monopoly in product a and a duopoly in product b makes higher profits by selling an a b bundle than by selling a and b independently leveraging market power from a into b and accepting some one product competition against the bundle is better than using the monopoly power in good a all by itself since bundling mitigates the impact of competition on the incumbent an entrant can expect the bundling strategy to persist even without any commitment the traditional explanation for bundling that economists have given is that it serves as an effective tool of price discrimination by a monopolist see stigler 1968 adams and yellen

resource curse or not a question of appropriability this thesis presents three self contained essays focusing on empirical questions in growth and development economics each article addresses specific questions on why countries perform differently in particular i analyse the effect of democracy on economic development the relationship between natural resources and growth and the efficiency of foreign development assistance in the first essay democracy consolidation and growth i analyse the effect of democracy on economic growth in this context i argue that an important aspect to consider is how consolidated political systems are put simply i find that it is not only a question of how democratic countries are but also how long they have been democratic in other words economic performance tends to improve with the duration of uninterrupted democracy the performance of autocracies on the other hand tends to deteriorate over time however for newly established political systems there seems to be a cost of being democratic this implies that democracies only bear their fruit after some time the analysis has important policy implications to overcome initial straits international assistance focused on democratic consolidation may be important and a very good investment in fostering long run development the second essay resource curse or not a question of appropriability together with anne boschini and jesper roine is concerned with the relation between natural resources and economic development for most laymen as well as for most economists it would seem reasonable that countries richly endowed in natural resources also benefit from this wealth however a large literature has found a systematic negative effect of natural resource abundance on economic growth we suggest that this so called resource curse is not determined by resource endowments alone but rather by the interaction between the type of resources a country possesses and the quality of institutions in the country this combination of factors determines what we call the appropriability of a resource the concept of appropriability captures the likelihood of natural resources leading to rentseeking corruption or conflicts which in turn will harm economic development our results suggest that if institutions are good enough the curse may be turned into a blessing this may explain why some countries such as norway and botswana tend to benefit from their resources while others such as angola and sierra leone do not the third and final essay of this thesis foreign sectoral aid fungibility growth and poverty reduction is a contribution to the aid efficiency literature which is concerned with the question of whether aid helps or hinders economic development foreign development assistance is often targeted on specific public expenditure sectors if this aid is not used in the sector for which it was granted e g health education it is said to be fungible and donors may end up financing something completely different from what they intended e g military expenditures the major concern about sectoral fungibility is that the alternative use of aid may be less productive or less socially useful however measuring fungibility is not sufficient to determine whether foreign sectoral aid fungibility is actually harmful what is important is how the funds treated as fungible are used the essay starts by obtaining estimates of fungibility for 57 countries the results suggest that sectoral aid is indeed largely treated as fungible by recipient countries next to assess the economic and health effects of fungibility these estimates are incorporated into an empirical model of aid and growth as well as into a model of aid and infant mortality altogether i find no evidence of more fungible sectoral aid leading to worse performance

price scarcity rent and a modified r per cent rule for non renewable resources since hotelling s seminal paper on the optimal depletion of exhaustible resources much has been published yet confusion remains about whether scarcity rent and price increase or decrease as a resource is depleted when costs tend to rise with depletion we show that hotelling s fundamental results of rising scarcity rent and price paths are sustained and that the path of scarcity rent converges on the r per cent rule provided the objective function is concave predictions of non monotonic or declining scarcity rent paths are due to implicit assumptions that lead to a non concave objective function we identify the sources of these non concavities jel classification q30 d90 c60 prix rente de rarete et une regle modifiee du r pourcent pour les ressources non renouvelables malgre la volumineuse litterature specialisee qui a fleuri depuis qu hotelling a ecrit son memoire fondateur sur l epuisement optimal des ressources renouvelables une grande confusion regne toujours quand il faut etablir si la rente de rarete et le prix augmentent ou chutent a proportion que la ressource s epuise quand les couts tendent a croitre avec l epuisement ce memoire montre que les resultats fondamentaux obtenus par hotelling quant aux sentiers de croissance de la rente de rarete et du prix tiennent toujours et que le sentier de croissance de la rente de rarete converge vers la regle du r pourcent pourvu que la fonction objective soit concave les predictions de sentiers de croissance non monotone ou de declin de la rente de rarete presentees dans la litterature specialisee sont attribuables a des postulats implicites qui engendrent une fonction objective non concave les auteurs identifient les sources de ces non concavites

vertical integration and firm boundaries the evidence since ronald h coase s 1937 seminal paper a rich set of theories has been developed that deal with firm boundaries in vertical or input output structures in the last twenty five years empirical evidence that can shed light on those theories also has been accumulating we review the findings of empirical studies that have addressed two main interrelated questions first what types of transactions are best brought within the firm and second what are the consequences of vertical integration decisions for economic outcomes such as prices quantities investment and profits throughout we highlight areas of potential cross fertilization and promising areas for future work

the testing and estimation of complete demand systems on household budget surveys a recent demand system aids is extended to include family size explicitly and then estimated on indian budget data the estimation using non linear fiml is performed first on pure time series and then on pooled cross section data within and across equation restrictions are imposed and tested the principal results include u a significant price and family size effects on the budget share of an item b sensitivity of test results on homogeneity and symmetry to i rural urban data ii time series cross section and iii inclusion omission of family size c considerable difference between pure time series and pooled cross section estimates and d difference between the expenditure responses of the rural and urban consumer

beer and the tie did divestiture of brewer owned public houses lead to higher beer prices in 1989 the united kingdom monopolies and mergers commission mmc recommended measures that eventually led brewers to divest themselves of 14 000 public houses the mmc claimed that their recommendations would lower retail prices and increase consumer choice since that time however retail prices have risen this paper contains an econometric analysis of the transition period the analysis is based on a model of the relationship between retail price and retail organisational form that emphasises how exclusive dealing clauses and strategic factors interact in 1989 in an important decision the united kingdom monopolies and mergers commission mmc recommended measures that eventually led brewers to divest themselves of 14 000 public houses the mmc claimed that their recommendations would lower retail prices and increase consumer choice there is considerable doubt however that their objectives were achieved indeed since the time that the recommendations were implemented retail prices have risen it is not clear however if prices would have increased in the absence of divestiture one goal of my research is to provide an answer to this question the mmc s recommendations created an exceptional opportunity to assess the effects that different contractual arrangements have on retail prices indeed one would like to investigate this relationship ceteris paribus unfortunately however the choice of vertical market structure is normally endogenous and it is impossible to condition on all of the factors that affect the contracting decision in the uk beer industry in contrast the government ordered changes in the type and terms of the contracts under which national brewers could operate their licensed premises increased separation between brewer and publican therefore was not due to changes in economic conditions moreover some premises the free houses that were not owned by a brewer were not affected by the beer orders the existence of a control group facilitates the analysis by strengthening the conclusions that one can draw in recent years economists have moved away from simple theories of vertical

vertical relationships and competition in retail gasoline markets empirical evidence from contract changes in southern california comment this study examines how much if any of the differences in retail gasoline prices between markets is attributable to differences in the composition of vertical contract types at gasoline stations in each market the purchase of the independent retail gasoline chain thrifty by arco provides a unique opportunity to examine the effects of changes in different vertical contract types on local retail prices this event caused sharp changes in the market share of i fully vertically integrated stations and ii independent stations differentially affecting local markets in the los angeles and san diego metropolitan areas using unique and detailed station level data this study examines how these sharp changes affected local retail prices the detailed data and the research design based on the thrifty station conversions allow for credible estimation of the effects of the market share of independent retailers and vertically integrated retailers on local market prices controlling for any omitted factors at the station level and the city level over time results for the los angeles and san diego metropolitan areas indicate that a decrease in the market share of independent stations has a significant positive impact on local retail price however a change in the market share of refiner owned and operated branded stations does not have a significant impact on local market price these results have important implications as policy makers consider the regulation of vertical contracts as a means to increase competition in gasoline markets the research design and detailed data also allow for inference on the underlying nature of retail gasoline competition

economic indicators of resource scarcity a critical essay abstract the theoretical arguments of the conceptual and empirical literature on economic indicators of long run resource scarcity are logically flawed if resource allocators were informed of the nature of resource scarcity their behavior and the economic indicators it generates would reflect the scarcity but if they were so informed we could simply ask them if resources were scarce if they are not informed their behavior and economic indicators are as likely to indicate their ignorance as the reality unfortunately there is no way of knowing whether they are informed or not unless we already know whether resources are scarce

cost raising strategies advantage rivals by raising their costs in this paper we show that strategies designed to raise rivals costs have a number of advantages over predatory pricing they are credible do not necessarily require the victim to exit and do not necessarily require the existence of classical market power the paper sets up a general model proves a number of general results and then applies the model to specific strategies involving overbuying inputs and vertical integration

estimating a transaction price for new automobiles for over 2 decades researchers have analyzed the overall demand for automobiles brems 1956 chow 1957 stone and rowe 1957 houthakker and taylor 1966 smith 1975 johnson 1978 while several researchers have begun to disaggregate automobile demand in response to the development of distinct submarkets blomqvist and haessel 1978 carlson 1978 lave and train 1979 they in a manner similar to earlier aggregate studies continue to assume that price is exogenous for instance smith in modeling the demand for new cars assumes the supply of new cars is perfectly elastic at a price exogenously fixed by the manufacturer smith 1975 p 14 yet over 2 decades ago jung 1959 1960 reported the survey results of chicago automobile dealers indicating that transactions prices and list prices differed significantly the degree of concentration in automobile manufacturing may have led previous researchers to ignore the fact that the transaction price for new automobiles is not set by the manufacturer but as jung reported is determined in a monopolistically competitive dealer market where the monopoly element is a consequence of less than perfect information arrow 1975 in a recent article in this journal carlson 1978 recognizes that list price and transaction price may researchers in analyzing the demand for automobiles have assumed that the price is fixed by the manufacturer and therefore can be considered to be exogenous in market studies this assumption contradicts earlier findings that transaction prices and list prices differed significantly this paper develops a model estimating the transaction prices of new automobiles it is argued that transaction prices for new automobiles are market determined transaction prices are found to be a function of dealer inventories and several other variables dealer inventories measured in terms of daily selling rates are used in the model as a proxy for market conditions

monopolistic recycling of oil revenue and intertemporal bias in oil depletion and trade this paper investigates oil depletion and trade when monopolistic oil producers also exercise monopoly power in the capital market a two period model views collusively organized oil producers with an initial trade surplus and a subsequent deficit when monopoly power in the capital market is applied to the disadvantage of borrowers less oil is initially made available to oil importers than if the interest rate had been competitively determined this depletion bias however is reversed if because of incentives for capital accumulation it is to the advantage of the oil producers to subsidize lending to the oil importers in either case the bias in oil depletion due to monopolistic recycling of oil revenue is greater the more vulnerable are oil importer s incomes to a curtailment of oil supplies 25 references

strategic and welfare implications of bundling abstract a standard oligopoly model of bundling shows that bundling by a firm with a monopoly over one product has a strategic effect because it changes the substitution relationships between the goods among which consumers choose bundling in appropriate proportions is privately profitable reduces rivals profits and overall welfare and may drive rivals from the market

sequential development and exploitation of an exhaustible resource do monopoly rights promote conservation this paper explores the problem of sequential exploitation of exhaustible resources by a monopolist when a setup cost must be incurred to access the next pool under certain circumstances the monopolist will always follow a more conservationist path of extraction and delay the introduction of new resource pools compared to a social planner however with other forms of consumer demand the monopolist may exhaust the resource more quickly especially if many new options will follow these results may apply especially to depletable resources like antibiotics or biotech products for which significant research and development costs are required followed by monopoly rights conferred by patents

do fast food chains price discriminate on the race and income characteristics of an area this article reports tests for differences in prices charged by fast food restaurants that serve markets with customers of widely divergent incomes and ethnic backgrounds the data contain detailed prices on items sold at over 400 burger king wendy s kfc and roy rogers restaurants in new jersey and pennsylvania locations i find significant differences in price based on the race and income characteristics of a zip code region when income and cost differences are taken into account meal prices rise approximately 5 for a 50 rise in the black population

efficiency effects of exclusive territories evidence from the indiana beer market the welfare effects of vertically imposed exclusive territories and the appropriate antitrust policy toward them have long been debated this paper sheds light on the exclusive territory controversy by examing the effects of indiana s 1979 ban on the grant of exclusive territories to beer wholesalers using time series data for 1948 1990 we find the ban reduced beer consumption in indiana by 6 percent coupled with previous evidence that indiana s ban reduced price our results suggest that exclusive territories in the beer industry increase demand and enhance welfare by stimulating the provision of dealer services

a simple characterization of the optimal extraction policy of a non renewable resource when extraction cost is stock independent abstract this note provides a simple characterization of the optimal extraction of a non renewable resource the proposed formula determines the solution in its feedback form it is shown to hold for a large class of models as long as the utility is stock independent

vertical integration raising rivals costs and upstream collusion abstract this paper analyzes the impact vertical integration has on upstream collusion when the price of the input is linear as a first step the paper derives the collusive equilibrium that requires the lowest discount factor in the infinitely repeated game when one firm is vertically integrated it turns out this is the joint profit maximum of the colluding firms the discount factor needed to sustain this equilibrium is then shown to be unambiguously lower than the one needed for collusion in the separated industry while the previous literature has found it difficult to reconcile raising rivals costs strategies following a vertical merger with equilibrium behavior in the static game they are subgame perfect in the repeated game studied here

the effects of resale price maintenance on shareholder wealth the consequences of schwegmann event study methodology is used to assess the effects of the 1951 u s supreme court schwegmann decision which severely weakened the enforcement of resale price maintenance contracts in the united states overall upstream industries with heavy resale price maintenance usage apparently were not adversely affected by the decision among large retailing groups a positive effect of the decision was found for department stores cross section tests of the motives for the adoption of resale price maintenance provide support for hypotheses based on free ridership dealer cartels and to a lesser extent protection of product reputation copyright 1994 by blackwell publishing ltd

firm size distributions in an industry with constrained resources we propose an equilibrium model for firm size distribution in an industry with a constrained essential input the model applies when the population of firms is small and homogeneous and the supply of the necessary input factor is perfectly inelastic we argue that although the gibrat assumption obtains this does not result in the lognormal distribution because of the entries exits and mergers of firms competing for the inelastic essential resource using our own 32 year database of firms we test the broken stick or random ordered interval model that we call the whitworth distribution successfully applied by others to a number of data sets including the abundances of bird species we propose the whitworth as the basic model of the equilibrium distribution of firm sizes for such supply constrained industries and find it fits our 31 year database best

tying foreclosure and exclusion in recent years the leverage theory of tied good sales has faced heavy and influential criticism in an important sense though the models used by its critics are actually incapable of addressing the leverage theory s central concerns here the author reconsiders the leverage hypothesis and argues that tying can indeed serve as a mechanism for leveraging market power the mechanism through which this leverage occurs its profitability and its welfare implications are discussed in detail copyright 1990 by american economic association

are all the good men married uncovering the sources of the marital wage premium a longstanding and yet unsettled question in labor economics is does marriage cause men s wages to rise cross sectional wage studies consistently find that married men earn significantly higher wages than do men who are not currently married however it is well known that inferring causal relationships from crosssectional analysis is inappropriate because of the biases introduced by unobserved heterogeneity as a means of circumventing this problem this paper uses data on identical twins to control for unobserved heterogeneity our estimates suggest that marriage increases men s wages by as much as 27 and that little if any of the cross sectional relationship between marriage and wages is due to selection in addition we find little evidence that the marital wage premium is a consequence of household specialization

a martingale characterization of the price of a nonrenewable resource with decisions involving uncertainty abstract this paper presents a general model of nonrenewable resource consumption and exploration decisions involving uncertainty about the time of occurrence of an event such as exhaustion stock discovery or a substitute development the resulting price process is characterized in terms of necessary and sufficient conditions under which the price is expected to rise at a rate equal to greater than or less than the discount rate the general model is illustrated and the price process and the optimal decisions are characterized by examining the three types of uncertainty indicated above

the limits of antitrust the author argues that the inhospitality tradition in antitrust has serious costs and causes judges to reject economically beneficial business practices he also contends that the main alternative to the inhospitality tradition the rule of reason enunciated by the supreme court does not provide useful guidance to judges in antitrust because it is completely open ended and provides no assistance in determining how to weigh the relevant factors he then proposes his own alternative approach error cost framework to deciding anti trust cases specifically he suggests that judges should mimic the approach taken by economists and deploy a series of presumptions or filters to guide their inquiry the author believes this would make it easier for businesses to plan their affairs and also reduce litigation costs

retail contracting theory and practice we summarize a number of regularities that arise in the empirical literature on contractual relationships between manufacturers and their exclusive resellers we do this using studies of traditional and business format franchise relationships as well as studies of salesforce integration decisions some of the patterns that we uncover are consistent with a standard incentive cum insurance theory of organization while others are not we brie y review some theoretical extensions that seem promising in terms of reconciling seeming con icts between theory and practice i introduction manufacturers of retail products must decide whether to sell their products to consumers themselves vertical integration or to sell via independent retailers vertical separation when manufacturers do not perform the sales function internally but want exclusive retailers they usually choose some form of franchising 1 many theories attempt to explain the choice of retail organizational form moreover a considerable body of empirical evidence concerning this choice is accumulating we attempt to evaluate this econometric evidence and relate it to the theories to accomplish this task we assess studies of franchising arrangements as well as studies of sales force organization in industrial settings the paper is organized as follows in the next section we highlight a number of regularities that arise in the empirical literature on retail contracting in particular we nd that i risk is positively related to the use of high powered incentives vertical separation ii the importance of the agent s eiort in production is positively related to the use of high powered incentives

the strategic choice of managerial incentives do firms with separate owners and managers maximize profits we address this question for an oligopoly where managers compete in quantities or prices as in the cournot or bertrand models and owners choose their managers incentives we find that there is a strategic aspect in the problem of selecting incentives and that profit maximizing behavior does not result in particular in the oligopoly we study the behavior of firms competing in quantity price more closely resembles perfectly competitive collusive behavior than cournot bertrand behavior

market shares in the uk passenger car market marketing expenditure and price effects 1975 80 1984 market shares in the uk passenger car market marketing expenditure and price effects 1975 80 applied economics vol 16 no 4 pp 611 632

inventories as an asset the volatility of copper prices the spot price of copper metal is known to be extremely volatile from 1958 to 1980 the mean monthly average price was 0 49 per pound in constant 1967 dollars while the standard deviation of month to month changes in the real price was 0 06 claims to copper inventories are traded on the london metal exchange lme a competitive world asset market this paper empirically investigates the dynamics of copper spot prices on the lme focusing on the rate of return to holding copper metal and on the implications of inventory stockouts for this rate of return we make one major departure from the standard economic theory of exhaustible resources 2 instead of assuming constant short run marginal cost srmc we incorporate rising srmc of extraction into the model 3 this technological assumption provides an economic motive for production smoothing by holding inventories equilibrium inventory holdings ameliorates rising srmc by moving extraction to low srmc time periods we show that this amelioration is imperfect because of inventory stockouts when stockouts can occur the spot price of a resource reflects transient shocks to its scarcity value as well as permanent shifts more specifically the economic motive for inventory holding affects the equilibrium price dynamics of exhaustible resources in two ways first as long as positive inventories are being held their holders should earn the competitive rate of return thus the price of extracted resource should rise at the rate of interest in expected value this result differs from most recent theoretical studies of exhaustible resources which conclude that price minus marginal extraction cost should rise at the rate of

vertical mergers and market foreclosure ythe model in this paper illustrates three effects of vertical mergers when both stages are oligopolistic and vertically integrated and unintegrated producers coexist first the merging firm increases its final good output second the resulting backward shift in the residual demand curve facing unintegrated final good producers ylowers their demand for the intermediate good third the merged firm withdraws from the intermediate good market the increased concentration pushes the intermediate good price upward which effect dominates depends on market structure under some conditions a vertical merger causes the price of the final good to increase

naked exclusion comment the ability of an incumbent firm to deter entry by writing exclusionary contracts with customers has been a subject of contention in the antitrust literature the courts concern with such exclusionary contracts has been challenged by those who argue that an incumbent faced with buyers whose interest is to promote entry and competition would have to pay buyers more for the inclusion of exclusionary provisions than it could possibly gain from exclusion in a provocative article eric b rasmusen et al 1991 henceforth rrw have argued that an incumbent may in fact be able to exclude rivals profitably using such contractual provisions because it can exploit buyers lack of coordination in essence if buyers expect other buyers to sign such provisions then they may see little reason not to do so themselves the rrw argument is potentially an important one because most alleged instances of entry deterrence through exclusionary contracts with customers occur in situations with multiple buyers unfortunately however rrw s two main results contain errors in this note we reconsider the rrw model providing correct characterizations of the likelihood and cost of exclusion for an incumbent firm our results indicate that while the intuition suggested by rrw is valid the equilibrium likelihood and cost of exclusion differ from what rrw derive moreover our analysis illuminates some further aspects of exclusionary contracting with multiple buyers among these issues we focus on how an incumbent can use discriminatory offers to exploit the externalities that exist among buyers in the provision of competition in section i we review the basic assumptions of the rrw model in sections ii and iii we then consider in turn the cases of simultaneous and sequential offers studied by rrw for the simultaneous model we distinguish between settings in which the incumbent can and cannot discriminate in its offers to different buyers this distinction is the source of the problem in rrw s analysis their simultaneous offer model assumes no discrimination but the proof of their proposition 2 assumes at times that discrimination is feasible we show that absent the ability to discriminate the incumbent can exclude profitably only when buyers fail to coordinate on their most preferred continuation equilibrium in contrast we show that when discrimination is possible the incumbent need not rely on a lack of buyer coordination to segal department of economics landau building stanford university stanford ca 94305 e mail ilya segal stanford edu whinston department of economics northwestern university 2003 sheridan road evanston il 60208 e mail mwhinston nwu edu we thank eric rasmusen john wiley and participants in the berkeley stanford iofest the university of copenhagen vertical restraints conference and a seminar at the antitrust division of the u s department of justice for helpful comments we thank federico echenique for excellent research assistance 1 for example a recent department of justice investigation concerned the use of exclusive contracts by the leading provider of computerized ticketing services ticketmaster most major cities have several large concert sports venues in many cities ticketmaster has exclusive contracts with a very large share of these venues 2 the other leading response to the argument that contracts with buyers cannot be a profitable method of exclusion is given in philippe aghion and patrick bolton 1987 section i one factor limiting the applicability of the aghion and bolton theory however is that it involves partial exclusion the contracts signed are not fully exclusionary they involve finite stipulated damages and the profitability of the strategy arises from extracting rents from an entrant when entry occurs indeed in the aghion and bolton model contracts that fully exclude offer no benefits over writing no contract at all in section iii of their paper aghion and bolton also discuss a two buyer version of their model in which externalities arise across buyers in contrast to the analysis here and in rrw they allow the incumbent to make an offer to a buyer i that is conditional on the acceptance decision of the other buyer 3 r innes and r j sexton 1994 also discuss the use of discriminatory offers in the context of a model in which buyers can form coalitions with the entrant

market foreclosure and vertical merger a case study of the vertical merger between turner broadcasting and time warner abstract we employ an event study methodology the event being the vertical merger between time warner and turner broadcasting distribution and programming respectively in the cable television industry we assess the effects of the merger on final prices subscriptions and carriage and marketing decisions of time warner the analysis finds several interesting facts first foreclosure in time warner markets following the merger is observed for the rival channels that are not integrated with any cable distributors second the turner broadcasting channels that increased market shares because of this merger appeared to be foreclosed by time warner prior to the merger the preference for own channels by time warner persisted despite a lower quality of channel bundles in its markets efficiency gains from the merger were not passed on to consumers

an economic theory of vertical restraints vertical restraints imposed by manufacturers on the prices locations and sales of retail firms represent a puzzling departure from the simple price mediated exchange of conventional markets in this article we analyze the theoretical basis for these restraints in a setting where retailers inform consumers and are imperfectly competitive and where a manufacturer has some monopoly power we identify three potential externalities affecting retailers decisions these externalities lead to the failure of simple uniform price contracts to coordinate the incentives of retailers with the objective of maximizing combined manufacturer and retailer profits we identify the packages of vertical restraints that are minimally sufficient under various conditions to neutralize the externalities and to achieve the joint profit maximum

the effects of state automobile dealer entry regulation on new car prices this paper examines the impact of state regulations restricting entry into new car retailing the central hypothesis is that these regulations create artificial scarcity rents for existing dealers which are collected through higher car prices a reduced form multiple regression model is specified with retail price as the dependent variable the model is estimated using transactions price data for a sample of over 5 000 chevrolet dealers and seven car lines in 1978 the results confirm the hypothesis that entry restrictions cause higher car prices

pricing and depletion of an exhaustible resource when there is anticipation of trade disruption this paper considers pricing and depletion of an exhaustible nonrenewable resource in an economy wherein domestic consumption is provided for by supplementing extraction from the economy s own resource stock with imports the future supply of which is not assured the socially optimal response to threat of trade disruption is a more conservationist depletion program for the domestic resource stock than would be called for if import supplies were assured to persist competitive domestic firms adopt the socially optimal conversationist program however firms anticipating domestic market power after the disruption of import supplies are revealed to overextract the domestic resource stock 33 references 2 figures

empirical evidence on on vertical foreclosure i introduction prior to the 1980s the united states department of justice and the federal trade commission actively challenged vertical mergers on the theory that such mergers foreclosed unintegrated rivals in the downstream market from access to inputs supplied by the merged firm this policy changed when critics of the foreclosure theory claimed that vertically integrated firms have no incentive to transfer products between the upstream and downstream markets at a price other than the market price and therefore vertical mergers have no effect on the price charged to consumers 1 the arguments against attacking vertical mergers were also supported by research that demonstrated that vertical integration can enhance efficiency 2 as a result vertical mergers currently receive very little if any attention from the enforcement agencies recent contributions by ordover saloner and salop 1990 krattenmaker and salop 1986 and salinger 1988 1989 have reopened the debate about the competitive effects of vertical mergers they each use theoretical models to show that vertical foreclosures can raise costs to unintegrated rivals and lead to higher prices for consumers although these models demonstrate that foreclosure can be a profitable strategy that injures competition to date these theories have not been tested empirically if vertical foreclosure rarely occurs or if it occurs only in a narrow set of circumstances changes in current policy on vertical mergers may not be justified a necessary but not sufficient condition for anticompetitive foreclosure is that the vertical merger cause the unintegrated rivals to be less profitable this result from previous theoretical work is tested here on a sample selected from all vertical merger cases challenged by the justice department and the federal trade commission during the period 1963 to 1982 we find no evidence of anticompetitive market foreclosure for the sample of cases challenged by the antitrust agencies one possible explanation for our results is that the tests over the entire sample are significantly affected by a few weak cases brought by the government during a period of aggressive antitrust enforcement we test this by examining variables that have been identified by krattenmaker and salop 1986 and the department of justice merger guidelines as being conducive to foreclosure such as barriers to entry and industry concentration even the cases with high industry concentration and barriers to entry which potentially should exhibit substantial market power provide no evidence of foreclosure while this does not preclude anticompetitive foreclosure as a possibility it does call into question the cases brought by the antitrust agencies during the 1960s and the 1970s until the proponents of the more rigorous economic version of the foreclosure theory provide clearer guidelines about the conditions under which vertical mergers are likely to injure competition continuation of the current policy of not contesting these mergers seems justified ii theory of anticompetitive foreclosure the foreclosure arguments used to challenge vertical mergers during the 1950s and 1960s were easily discredited because no formal theory was used to support them more recent attempts to reconstruct the foreclosure theory have used economic models to demonstrate that vertical foreclosure can reduce competition the key to each of these models is that foreclosure raises the costs to the unintegrated rivals of the merged firm and this under certain conditions raises the price of the final product to the consumer the legal definition of foreclosure focuses on the ability of unintegrated firms to buy from or sell to integrated rivals while the economic definition of anticompetitive foreclosure focuses on whether prices to consumers increase salinger 1988 has provided a model that demonstrates the conditions under which anticompetitive foreclosure will occur

optimal pricing use and exploration of uncertain natural resource stocks abstract units of natural resources to be called mines are assumed distributed over an unexplored territory according to a poisson process in space at any moment total reserves and unexplored land are given society can determine the rate of consumption and the rate of exploration reserves are drawn down by consumption and increased by discoveries made during exploration the amount of unexplored land is decreased by exploration at any moment the payoff of society is a concave function of consumption less a linear function of exploration with future payoffs discounted optimal policies are considered and in particular it is shown for a large amount of unexplored land the shadow prices of reserves and of unexplored land move in random cycles but show only a slight upward tread thereby casting some light on the failure of mineral prices to rise at the market rate of interest

monopoly extraction of an exhaustible resource with two markets although much has been written about monopoly extraction of natural resources the case of a resource being sold in two separate markets has escaped notice we find that a monopolist facing two different iso elastic demand schedules extracts more rapidly than the social planner whether or not arbitrage prevents price discrimination between markets jel classification d42 q3 extraction monopoliste d une ressource epuisable quand il y a deux marches meme si l on a ecrit beaucoup a propos de l extraction monopoliste de ressources naturelles epuisables il semble que le cas d une ressource vendue dans deux marches separes n a pas ete traite on decouvre qu un monopoleur faisant face a deux cedules de demande iso elastiques differentes extrait la ressource plus rapidement que le planificateur social que l arbitrage entre les marches empeche ou non la discrimination par les prix

the hotelling rule in non renewable resource economics a reassessment harold hotelling s 1931 contribution is known for providing a basic principle the hotelling rule to the economics of non renewable resources nearly ninety years later empirical tests conclude the rule lacks empirical validity requiring strong amendments to describe the long term aggregate behavior of its target object on the basis of hotelling s unpublished archival material this paper revisits the place given to the hotelling rule in non renewable resource economics our reconstruction shows that hotelling s 1931 paper has been misinterpreted from the outset the hotelling rule was not valid for mineral resources in contrast the consideration of two inherent geological constraints alongside exhaustibility offered the opportunity for an alternative basic framework capable to generate bell shaped and u shaped equilibrium trajectories for supplies and prices respectively inspired by this unknown aspect of hotelling s work brought to light by our archival investigation we sketch this alternative basic model enabling non renewable resource economics to circumvent the empirical shortfalls of the hotelling rule

competition in the medical profession an application of the economic theory of regulation although economists generally believe that the medical profession earns above normal returns by restricting entry this proposition has never been directly tested there have been indirect attempts to determine the existence and extent of above normal returns in medicine by comparing the rate of return to investment in medicine with various other occupations the first work along these lines was performed by friedman and kuznets 9 using income data generated for various professions in the 1930s they found physicians enjoyed a substantial premium over dentists in terms of the rate of return to their educational expenses friedman and kuznet s results however are not without critics 13 14 in addition to the findings of friedman and kuznets kessel 11 12 has criticized the medical profession for cartel behavior again others disagree with this contention the debate continues but no test of the actual effect of licensing limitations on the salaries of physicians and hence rate of return to investment in medical education has been performed that task is the purpose of this study peltzman 15 has provided a general theory of regulation which may be employed to test the effect of restrictive practices of the medical profession on the level of physicians earnings and thus provide evidence as to the intent and result of physicians restrictive practices section ii of this paper is a review and critique of the literature concerned with restrictive practices and above normal returns to the medical profession the third section extends peltzman s theory to the case of a self regulating profession the structure of regulation in medicine section iv empirically tests the model and discusses its implication the fifth and final section contains a summary and conclusions

resale price maintenance an economic assessment of the federal trade commission s case against the corning glass works this article examines the economic explanations for the use of resale price maintenance rpm by the corning glass works using empirical evidence developed from the federal trade commission s case challenging the practice three classes of rpm theories are tested the supplier and dealer anticompetitive theories and the class of principle agent theories the article uses both ex ante and ex post tests to distinguish the theories including tests based on structural evidence as well as data on sales advertising and stock market reactions for the company and its competitors around critical events in the case the evidence most convincingly rejects the anticompetitive theories and points toward a principle agent explanation in which rpm helped increase sales of corning s products the case is of interest in part because the simple products at issue in the case are not the types of products most often associated with potential efficiency explanations for rpm

a test of the hotelling valuation principle time series tests of the hotelling r percent rule for natural resource prices have not been strongly supportive but the tests and the data are subject to serious difficulties we propose here an alternative testing strategy based on another but less widely known implication of the hotelling model we test this implication which we call the hotelling valuation principle by regressing the market values of the reserves of a sample of u s domestic oiland gas producing companies on their estimated hotelling values we find that the estimated hotelling values account for a significant portion of the observed variations in market values and that the hotelling measures are better indicators of the market values of petroleum properties than two widely cited publicly available alternative appraisals

hotelling under pressure we show that oil production from existing wells in texas does not respond to oil prices while drilling activity and costs respond strongly to explain these facts we reformulate hotelling s class

bilateral control with vertical contracts when a manufacturer contracts secretly with competing retailers he is subject to opportunism and linear or non linear tariffs may not allow the manufacturer to maintain monopoly prices to analyse the effects of rpm o brien shaffer 1992 use a concept of contract equilibrium which concentrates on pairwise deviations thereby questioning the robustness of the analysis this paper emphasises the distinction between the contract equilibrium and standard non cooperative concepts we advocate for some caution in the use of the former concept as if overlooks an inexistence problem we then confirm the intuition that rpm can help solve the manufacturer s commitment problem this confirms that o brien shaffer s insight is robust and validates the courts reluctance against rpm

innovation and the dynamics of global warming global warming and the carbon cycle are a dynamic system with positive feedbacks fossil fuels are exhaustible resources these two facts mean that innovation in clean energy technology rather than mitigating global warming can lead to a permanently higher temperature path this paper explores the impact of innovation in the simplest model linking the economic theory of exhaustible resources with positive feedback dynamics in the carbon cycle

time discounting in harold hotelling s approach to natural resource economics the unsolved ethical question the paper focuses on harold hotelling s approach to time discounting in the context of the intertemporal allocation of exhaustible natural resources in 1931 hotelling introduces a positive discount rate when dealing with the social value or total utility derived from a resource his position was in contrast with early economic literature on conservation as well as with the point of view of frank ramsey according to whom time discounting expressed an unjustified preference for the welfare of present generations over that of future ones hence it has been argued that hotelling dismissed ethical concerns using archival material we find that for hotelling economic questions should not be restricted to issues of economic efficiency that his choice to discount utility which he considered as analogous to a concrete benefit at the interest rate is compatible with ramsey s position and more broadly that this choice does not preclude an ethical position on the desirable distribution of exhaustible resources through time to hotelling ethics is implemented by politics through fiscal corrections of the interest rate revisiting hotelling on the articulation between ethics allocative efficiency and policies allows us to rethink the way we do that in current models using time discounting

the economics of franchise contracts as an organizational arrangement the franchise contract lies between anonymous price mediated exchange and centralized intrafirm employment in contrast to conventional market exchange franchise contracts typically impose on franchisees retail quality standards common hours of business price controls and nonlinear payment schedules for example fixed initial royalty fees plus a percentage of gross retail revenues while franchisors typically provide national advertising and training programs monitor and inspect the franchisees performance with varying intensity across industries and hold the residual power to terminate the franchise agreement observations of actual terminations indicate that franchisors sometimes exclude this power franchisors sometimes face persistent queues of potential franchisees in contrast to simple employment contracts franchise agreements provide for sharing of profits through royalties on revenue or output and considerable freedom for independent decisions by local franchisees 1 why do these franchise contracts exist