price dependent profit sharing as a channel coordination device we show how an upstream firm by using a price dependent profit sharing rule can prevent destructive competition between downstream firms that produce relatively close substitutes with this rule the upstream firm induces the retailers to behave as if demand has become less price elastic as a result competing downstream firms will maximize aggregate total channel profit when downstream firms are better informed about demand conditions than the upstream firm the same outcome cannot be achieved by vertical restraints such as resale price maintenance price dependent profit sharing may also ensure that the downstream firms undertake efficient market expanding investments the model is consistent with observations from the market for content commodities distributed by mobile networks

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

implicit understandings in channels of distribution formal agreements can be used to achieve coordination among channel members these agreements work by exerting explicit control over the members who make the agreements however implicit understandings can be used as a partial substitute for more formal agreements in this paper we show that implicit understandings can develop as channel members learn about each other s behavior we show that this learning leads to the use of the implicit influence each channel member has over the other s behavior the learning leading to an implicit understanding requires some form of experimentation or historical observation this learning results in an oscillating retail price when only one channel member learns the other s behavior both channel members obtain greater profits than when neither member learns and both channel members obtain less profits than when both members learn however the member who does not learn obtains more profits than the member who learns we also show that implicit understandings r

immigrant specificity and the relationship between trade and immigration theory and evidence studies routinely document that immigrant employment concentrates in non traded goods sectors and that many immigrants have low inter sectoral mobility we consider these observed characteristics of immigrant employment with regard to the question of how immigration affects a nation s pattern of production and trade we model an economy producing three goods one is non traded domestic labor and capital are domestically mobile but internationally immobile allowing that some new immigrants will become specific to the non traded goods sector the model indicates that the effects of immigration on output and trade depend importantly on the sectoral pattern of employment of both new and existing immigrants empirical investigation in a panel data set of oecd countries supports the model s prediction that immigration raises the output of non traded goods consistent with the model we also find that immigration and trade are complements given its empirical support the model s implications for immigration policy are then discussed

factor endowments and the international location of production econometric evidence for the oecd 1970 1985 abstract this paper uses data on manufacturing output and factor endowments for 20 oecd countries from 1970 to 1985 to examine the production side of the factor proportions model under well known conditions there will be a linear rybczynski relationship between sectoral outputs and factor endowments across countries this proposition is investigated using the kalman filter and maximum likelihood techniques to estimate time varying parameter models the results indicate that capital and unskilled labor are sources of comparative advantage for most industries while skilled labor is a source of comparative disadvantage residual analysis shows that the neoclassical model has poor explanatory power

outsourcing retail pricing to a category captain the role of information firewalls it has been argued that retailers lack both the resources and capabilities to maximize category performance retailers may seek category management cm advice from a manufacturer referred to as a category captain cc a cc s recommendations affect all brands in the category not just her own despite an increase in the number of cc collaborations retailers are still concerned about manufacturer opportunism and militant behavior by manufacturers not selected as ccs whereas government agencies are worried about anticompetitive behavior that could harm consumers the federal trade commission recommends strictly enforced information firewalls within a cc s organization as a best practice guideline in this study we develop an empirical model and use policy simulations to quantify the impact of cc arrangements with information firewalls on retailers manufacturers and consumers we show how these effects could be influenced by the deactivation of vertical and horizontal information firewalls within the cc s organization

changing trade patterns in major oecd countries disaggregated trade data are used to examine changing trade patterns for five developed economic regions the usa the european union australia canada and japan this study covers the 1980 1997 time period during which international trade for most goods faced less border protection changing trade patterns are found for the usa japan and the eu while persistent trade patterns are observed for australia and canada classifying goods into four groups trade patterns found in manufactured goods were the most dynamic and trade in bulk agricultural goods the most persistent

the economic significance of national border effects to address the economic significance of national border effects this paper provides evidence on two fundamental questions 1 do large border effects arise because of high perceived price wedges between foreign and domestic products or because imports and domestic goods are very close substitutes and 2 if price wedges are important do they reflect distortionary barriers to trade or do they arise from nondistortionary factors such as differences in transactions costs or product characteristics i conclude that while border effects may imply barriers welfare costs and a role for policy distortions are probably not as substantial as initial border results suggested jel f1

border effects and the availability of domestic products abroad trade between countries could fall short of trade within a country because 1 the volume of international trade is less than the volume of domestic trade for a given product the intensive margin or 2 some goods that are sold domestically are simply not exported the extensive margin my theoretical model illustrates that either of these two factors could explain a given aggregate border effect i examine the empirical relevance of this distinction by isolating the fraction of total domestic production attributable only to exporters finding that around one half of the border effect may be attributed to each explanation jel classification f1 les effets de frontieres et la disponibilite de produits domestiques a l etranger le commerce entre pays peut etre moindre que le commerce a l interieur d un pays parce que 1 le volume de commerce international est moindre que le volume du commerce interieur pour un produit donne la marge intensive ou 2 certains biens qui sont vendus a l interieur d un pays ne sont tout simplement pas exportes la marge extensive un modele theorique montre que l un et l autre de ces facteurs pourraient expliquer un certain effet de frontiere au niveau agrege on montre l importance empirique de cette distinction en isolant la fraction de la production interieure totale attribuable strictement aux exportateurs et il s avere qu a peu pres la moitie de l effet de frontiere est attribuable a chacune des deux explications

competition in durable goods markets the strategic consequences of leasing and selling in marketing durable goods manufacturers use varying degrees of leasing and selling to consumers e g cars photo copiers personal computers airplanes etc the question that this raises is whether the distinction between leases and sales is simply one of price or whether the proportion of leases and sales effects a firm s ability to compete in the market in this paper we use two approaches to argue that leasing and selling create strategic consequences that extend beyond prices first we develop a stylized theoretical model that shows that the optimal proportion of leases and sales depends on the competitiveness of the market and on the inherent reliability of the firm s product and second we find support for the implications of our theoretical model with data from the automobile industry the u s automobile industry has seen a large increase in leasing over the last five years however the extent to which leasing has been embraced varies widely across manufacturers for example in 1993 the sport utility segment had the following lease percentages ford explorer 29 jeep grand cherokee 24 toyota 4 runner 11 and chevrolet blazer 9 in addition manufacturers often vary lease percentages across models for example in 1993 ford leased 22 of its crown victoria model 35 of its taurus model and 42 of its probe model a popular argument for why we see these differences is that higher priced cars are leased more often because leasing makes them more affordable however this rationale is not compelling in the face of our data for example the ford probe was priced significantly lower than the crown victoria and yet it was leased almost twice as often to develop a better understanding of why we observe differences in the proportion of leasing we develop a two period model of a duopoly in which each manufacturer chooses its optimal quantity and the fraction of units it wants to lease we find that in equilibrium neither firm leases all its units either they use a mix of leasing and selling or they use only selling our analysis suggests that the fraction of leased cars decreases as the manufacturers products become more similar and the competition between them increases the intuition for this result is that a higher fraction of leases puts the firm at a competitive disadvantage in the future this occurs because unlike firms that sell their product firms that lease are at a price disadvantage another important finding in this paper is that the extent of leasing chosen by a manufacturer depends on the reliability of its product in particular all else being equal the lower a product s reliability the lower its proportion of leases within the context of the automobile industry this suggests that more expensive cars may be leased more often because they are of higher quality and not necessarily because they are more expensive finally we test the implications of our theoretical model with data from the u s automobile market in particular for 1993 model year cars we develop a measure of reliability using data from consumer reports in addition we develop a measure of the extent of competition in each segment of the automobile market we support our hypotheses by finding that the extent to which a car model is leased depends strongly on its predicted reliability and on the competitive intensity within the segment

managing channel profits a channel of distribution consists of different channel members each having his own decision variables however each channel member s decisions do affect the other channel members profits and as a consequence actions a lack of coordination of these decisions can lead to undesirable consequences for example in the simple manufacturer retailer consumer channel uncoordinated and independent channel members decisions over margins result in a higher price paid by the consumer than if those decisions were coordinated in addition the ensuing suboptimal volume leads to lower profits for both the manufacturer and the retailer this paper explores the problems inherent in channel coordination we address the following questions what is the effect of channel coordination what causes a lack of coordination in the channel how difficult is it to achieve channel coordination what mechanisms exist which can achieve channel coordination what are the strengths and weaknesses of these mechanism what is the role of nonprice variables e g manufacturer advertising retailer shelf space in coordination does the lack of coordination affect normative implications from in store experimentation can quantity discounts be a coordination mechanism are some marketing practices actually disguised quantity discounts we review the literature and present a simple formulation illustrating the roots of the coordination problem we then derive the form of the quantity discount schedule that results in optimum channel profits this article was originally published in marketing science volume 2 issue 3 pages 239 272 in 1983

a theory of soft capture in this paper wee propose a model for regulatory capture that is based on information transmission and asymmetric information in a three tier model a regulator is charged by a political principal to provide a signal for the type of a regulated firm only the firm can observe his type and the production of a correlated signal with a given accuracy is costly for the regulator the firm can costlessly provide an alternative signal of lower accuracy that is presented to the regulator in a self enforcing equilibrium the regulator transmits the firm produced signal internalizes its own savings in information cost and the firm enjoys higher information rents the main feature of soft capture is that it is not based on a reciprocity of favors but on a congruence of interests between the firm and the regulator

openness to trade in manufactures in the oecd abstract how open are the advanced economies to trade with each other in this paper openness is calculated relative to the predictions of the monopolistic competition trade model using data on manufacturing trade and production in the oecd in 1985 the paper finds that 1 japan imports much less than other large oecd countries while the european countries have larger import volumes than does the us 2 japan and the us engage in less intra industry trade than the rest of the oecd and 3 the eu countries are less open to imports from japan and the us than those countries are open to imports from the eu

existence of coordinating transshipment prices in a two location inventory model we consider a two location production inventory model where each location makes production decisions and is subject to uncertain capacity each location optimizes its own profits transshipment at a cost is allowed from one location to another we focus on the question of whether one can globally set a pair of coordinating transshipment prices i e payments that each party has to make to the other for the transshipped goods that induce the local decision makers to make inventory and transshipment decisions that are globally optimal a recent paper suggests for a special case of our model that there always exists a unique pair of coordinating transshipment prices we demonstrate through a counterexample that this statement is not correct and derive sufficient and necessary conditions under which it would hold we show that in some conditions coordinating prices may exist for only a narrow range of problem parameters and explore conditions when this can happen finally we study the effects of demand and capacity variability on the magnitude of coordinating transshipment prices

marketing information a competitive analysis selling information that is later used in decision making constitutes an increasingly important business in modern economies jensen jensen fred o 1991 information services congram friedman eds the ama handbook of marketing for the service industries chapter 22 ama com new york 423 443 information is sold under a large variety of forms industry reports consulting services database access and or professional opinions given by medical engineering accounting financial and legal professionals among others this paper is the first attempt in marketing to study competition in the rapidly emerging information sector specifically we are interested in answering the following questions 1 is competition fundamentally different when competing firms sell information rather than traditional goods and services and if yes why 2 what are the implications of such differences for decision makers marketers and regulators 3 can we explain some of the observed marketing strategies in the information industry as such the audience of the paper includes academics as well as professionals who are interested in understanding what is specific about competition in information markets familiarity with the practical implications of such differences and understanding of the mechanisms that drive them is essential for those who are faced with the problem of marketing information to answer the above research questions we build a simple game theoretic model that consists of two firms selling information to a population of consumers who are heterogeneous in their willingness to pay for the quality of information the most important features of the model are the following information products sold by the two firms are modeled as random draws from two normal distributions having equal mean the variances of these distributions and their correlatedness constitute the product attribute space which is assumed to be common knowledge consumers are interested in assessing the mean of the distributions and to do so they can buy the sample from any of the firms or they can buy both samples and combine them to obtain a more accurate estimate quality of information is linked to the accuracy of consumers estimate of the mean which in turn is influenced by the accuracy of each sample as well as by their correlatedness consumers utility depends on the quality of information they purchased on their inherent utility for quality taste and on the total price they paid to acquire information knowing consumer preferences firms simultaneously price their information products the main finding of the paper is that information markets face unique competitive structures in particular the qualitative nature of competition changes depending on basic product characteristics while traditional products and services compete either as substitutes or as complements in the relevant product attribute space information may be one or the other depending on its position within the same product attribute space said differently the nature of competition changes qualitatively with a continuous change in basic product attribute levels the intuition behind this finding is the following when purchasing information consumers facing important decisions may find it beneficial to purchase from several information sellers this is more likely to happen when the reliability of information is low and the sources of information are independent under such conditions information products tend to be complements and as a result competition between sellers is relatively mild in the opposite case when information is reliable and or sellers sources are highly correlated consumers are satisfied after consulting a single source in this case information products are substitutes and sellers tend to undercut one another s prices to induce consumers to choose their brand understanding this discontinuity in competitive structures has important implications for decision makers as very different strategies are optimal under different product characteristics under substitution traditional strategies to avoid competition e g differentiation are recommended when the competing products reliability is generally low they are complements firms are better off accommodating competition in fact we find that a firm may benefit from inviting a competitor finally our findings are also important for regulators of information markets as the literature on complementarity suggests price fixing agreements between firms offering complementary products may benefit firms as well as consumers

strategic decentralization in channels the purpose of this paper is to understand the effect of strategic interaction on a manufacturer s channel structure decision in the model i analyze if there were no strategic interaction then the manufacturer would prefer vertical integration to decentralization with strategic interaction however decentralization can be a nash equilibrium strategy as mcguire and staein mcguire timothy richard staelin 1983a an industry equilibrium analysis of downstream vertical integration marketing sci 2spring 161 192 showed so the question arises what is it about strategic interaction that makes decentralization a nash equilibrium strategy the answer i give is that strategic interaction makes it possible for a manufacturer s retail demand curve to rise when he decentralizes i show that this raising of the demand curve on decentralization can happen only if one of the following mutually exclusive conditions is satisfied 1 the manufacturers products are demand substitutes at the retail level and strategic complements at the manufacturer or retailer levels 2 the manufacturer s products are demand complements at the retail level and strategic substitutes at the manufacturer or retailer levels strategic complementarity at the retailer manufacturer level means that if one retailer manufacturer raises his price then the other retailer manufacturer would raise his price as well strategic substitutability is just the opposite these results show that what is important for decentralization to occur is not how demand substitutable the two manufacturers products are as one might have thought from earlier works in the literature but rather the nature of coupling between demand dependence and strategic dependence

testing the heckscher ohlin vanek theory with a natural experiment i use the historical episode of near elimination of commuting from the west bank into israel to test three key predictions of the heckscherohlinvanek model of trade and find strong support for them on the production side i use variation between districts and find that wage changes were not correlated with the size of the shock to the labour force factor price insensitivity and that districts that received larger influx of returning commuters shifted production more towards labour intensive industries rybczynski effect on the consumption side data are consistent with identical homothetic preferences which combined with the production results supports the heckscherohlinvanek theorem on the factor content of trade

on the existence of share contracts under limited liability abstract in a principal agent relationship under limited liability the agent in general receives the full share of revenue we show that when the agent exerts effort in multiple tasks the effort substitution effect helps explain the existence of share contracts even under limited liability

estimation of cross country differences in industry production functions abstract international trade economists typically assume that there are no cross country differences in industry total factor productivity tfp in contrast this paper finds large and persistent tfp differences across a group of industrialized countries in the 1980s the paper calculates tfp indices and statistically examines the sources of the observed large tfp differences across countries two hypotheses are examined to account for tfp differences constant returns to scale production with country specific technological differences and industry level scale economies with identical technology in each country the data support the constant returns different technology hypothesis over the increasing returns same technology hypothesis

bridging trade theory and labour econometrics the effects of international migration this paper surveys current theoretical and empirical research on international migration with a particular emphasis on the links between trade theory and labour empirics

improving channel coordination through franchising in this paper we explore the role of franchising arrangements in improving coordination between channel members in particular we focus on two elements of the franchising contract namely the royalty structure and the monitoring technology we begin with a simple analysis where a manufacturer distributes its product through a retailer and the retail demand is affected by the retail price and the service provided by the retailer in this context we show that neither royalty payments nor monitoring are needed for full coordination we then extend the model to allow for free riding by franchisees and show that although monitoring helps affect the behavior of the franchisees royalty payments are still unnecessary to coordinate the activities of the franchisor and the franchisees finally we show that in environments where factors affecting retail sales are controlled by both the franchisor and the franchisee royalty payments provide the necessary incentives for the franchisor while monitoring systems are used to ensure that franchisees also behave in the best interest of the channel our general results are found to be consistent with those in brickley and dark 1987 and norton 1988 who conclude that franchising is affected by principal agent problems our theory finds special support in the work of lafontaine 1988 where it is concluded that the incidence of franchising is related to cost of monitoring and the importance of franchisor investments

a bargaining theory of distribution channels abstract a critical factor in channel relationships between manufacturers and retailers is the relative bargaining power of both parties in this article the authors develop a framework to examine bargaining between channel members and demonstrate that the bargaining process actually affects the degree of coordination and that two part tariffs will not be part of the market contract even in a simple one manufacturer one retailer channel to establish the institutional and theoretical bases for these results the authors relax the conventional assumption that the product being exchanged is completely specifiable in a contract they show that the institution of bargaining has force and it affects channel coordination when the complexity of nonspecifiability of the product exchange is present the authors find that greater retailer power promotes channel coordination thus there are conditions in which the presence of a powerful retailer might actually be beneficial to all channel members the authors rec

adoption transfers and incentives in a franchise network with positive externalities we study franchise arrangements that allow franchisees with exclusive territories to own their customers this permits franchisees to benefit from positive externalities in the franchise network through interfranchise transfers based on the purchases by their customers at other franchises on the network using the structure of a single franchisor and many franchisees we show that in general interfranchise transfers between franchisees and incentives for franchisee investment in the expansion of their customer base are critical both to the size and to the benefits derived from the franchise network specifically we find that when individual franchisees make investments in marketing effort to increase their customer base the franchisor s setting of the interfranchise transfer trades off the positive effects on network size with the negative effects of removing franchisee incentive for investment this result is due to the fact that interfranchise transfers encourage adoption but discourage full investment in marketing effort as compared to first best franchisee investment use of the royalty and the inter franchise transfer directly dissipates franchisee profits and indirectly dissipates franchisee profits through less than universal adoption thereby causing franchisees to underinvest as compared to traditional franchise systems however use of the interfranchise transfer results in franchises making greater investments than they otherwise would

moral hazard asset specificity implicit bonding and compensation the case of franchising i introduction there is a large and growing interest in the structuring of compensation to deal with the moral hazard problem much of this literature treats various forms of income sharing such as piece rates and sharecropping as a means for a principal to provide incentives to an agent this literature has been extended to the case of two sided moral hazard where both parties to an exchange may shirk another mechanism to induce effort discussed in the literature is bonding where workers post a bond that is forgone if effort is inadequate klein 1980 and klein and leffler 1981 treat the possibility of specific assets as constituting an implicit bond where poor performance by a firm is penalized by bankruptcy and sale of assets at a loss this paper studies a situation where these issues coalesce the case of compensation arrangements in franchising the typical franchise contract calls for the sharing of franchise income between franchisee and franchisor additionally franchisees may be terminated for poor performance if franchise assets have a degree of specificity the ensuing sale of assets at a loss provides a penalty for poor performance we examine the determinants of franchise royalty rates and fees in this setting while there is a literature on two sided moral hazard and some empirical work on franchising based on this idea none incorporates the potential influence of asset specificity we explicitly consider the role of implicit bonding and asset specificity in conjunction with moral hazard on the part of both trading parties we go beyond previous work in franchising by estimating the effects of asset specificity and other influences on the royalty rate further part of our empirical work utilizes improved micro data on actual franchise contracts our approach and its implications are discussed in section ii consistent with previous work we expect the royalty rate to decrease increase as the importance of the franchisee s franchisor s input increases however more specific capital with the threat of termination acts as an implicit bond and substitutes for a reduced royalty rate in inducing franchisee effort thus we expect royalty rates to increase with asset specificity also unlike other approaches we do not necessarily expect an inverse relationship between the royalty rate and the franchise fee for example the greater the importance of franchisor effort the higher the royalty rate but the franchise fee may also increase if franchise revenue rises by enough our hypotheses are tested using two different data sets an original firm level data set is taken from federal trade commission ftc required uniform franchise offering circulars ufoc 1 in addition data are obtained from bond s 1989 the source book of franchise opportunities the data are discussed and the results presented in section iii we find substantial support for our approach for example factors that increase the importance of the franchisee s effort such as the number of employees supervised lower the royalty rate and increase the franchise fee also a reduction in the specificity of the franchisee s investment due to leasing lowers the royalty rate and raises the franchise fee 2 section iv summarizes our findings and concludes the paper ii the approach and the hypotheses the typical franchising contract consists of a two part payment by the franchisee to the franchisor the franchisee pays an up front nonrefundable franchisee fee and a continuing royalty payment usually a percentage of sales in return the franchisee receives the right to use the franchisor s brand name capital and a method of operation in addition the franchisor provides on going support to the franchisee however the franchisor maintains the right to unilaterally terminate the contract if the franchisor determines that the franchisee is not delivering a product consistent with the quality guaranteed by the brand name

endowments output and the bias of directed innovation in this paper i ask the question does the output mix of countries change in response to changes in factor endowments if so how long does it take using data on capital as well as skilled and unskilled labour employed in three digit international standard industrial classification isic manufacturing industries for a sample of 27 developing and developed countries over the 1973 1990 period i find that the output mix of countries does not change in response to endowment changes even after 15 years this answer raises another question how then do countries absorb changes in factor endowments the data show that in both the short and long runs an increase in the supply of a production factor reduces its rate of return and makes it more intensively used in all sectors of the economy changes in production techniques in the long run the point estimate is that the reduction in the rate of return is more than 50 larger than in the short run this is consistent with induced innovations being predominantly biased towards the scarce factor

the optimality of ad valorem contracts we provide a new theory of ad valorem contracts i e contracts that vary with the value of the transaction which can explain why such contracts are widely used between vertically related partie

making new franchise systems work this paper argues that new franchise systems are more likely to survive if they are structured to economize on agency costs after controlling for industry effects and firm age and size this paper shows empirical support for six of nine hypotheses about the linkage between mechanisms for economizing on agency costs and the survival of new franchise systems 1998 by john wiley sons ltd

when showrooming increases retailer profit abstractshowrooming the phenomenon of consumers visiting a brick and mortar b m store to learn about products but then buying online to obtain lower prices is attracting increased attention both in business practice and in academic literature it is considered a major threat to the b m retailers and determining how to fight it seems to be the only consideration however the manufacturer s need for retail informational services has always been one of the essential reasons for retailers to exist and is a means for retailers to achieve profitability the popular arguments about the threat of showrooming ignore the strategic role of the manufacturer in the distribution channel this article analytically shows that when the manufacturer s decisions are considered i e when the manufacturer retailer contract is endogenous consumers ability to engage in showrooming may lead to increased rather than decreased profitability for b m retailer s thus retail efforts to restrict showrooming behavior m

manufacturer s return policies and retail competition manufacturers returns policies are a common feature in the distribution of many products the obvious rationale for returns policies is insurance practitioners not surprisingly have a different perspective and view returns as a cost of doing business in this paper we study the strategic effect of returns policies on retail competition and highlight its profitability implications for a manufacturer the setting for our research is the distribution of products with uncertain demand limited shelf lives and retail competition our objective is to provide a better understanding of when manufacturers should adopt returns policies the insights are obtained with a model based on the economics of strategy and decision making under uncertainty we show that when retailing is competitive and there is no uncertainty in demand a returns policy subtly induces retailers to compete more intensely the provision of a returns policy reduces retail prices without affecting wholesale prices thereby reducing retailer margins and improving manufacturer profitability the intuition is that with a returns policy cournot like levels of retail stocks cannot be sustained each retailer will order stocks so that it will not be constrained by stocks and so intensifying retail competition when however demand is uncertain and there is a single retailer a returns policy encourages the retailer to over stock and so decreases upstream manufacturer profits while the provision of a returns policy leads to lower retail margins the optimality of returns policy depends on the overall uncertainty and marginal cost a returns policy reduces the dispersion in retail prices between the high and low states of demand and the range of retail prices in the returns case is contained within the range of retail prices for the no returns case in the general setting when there are competing retailers and demand is uncertain there is a trade off for the manufacturer between the benefits more intense retail competition and the costs excessive stocking of a returns policy we find that a manufacturer should accept returns when the marginal production cost is sufficiently low and demand uncertainty is not too great to validate the results of our theory we conduct an empirical test with data from a major u s retailer the tests confirm our prediction that a returns policy intensifies retail competition and reduces retailer margins our theory and empirical test should interest practitioners and researchers in distribution especially those concerned with managing retail competition

direct marketing indirect profits a strategic analysis of dual channel supply chain design the advent of e commerce has prompted many manufacturers to redesign their traditional channel structures by engaging in direct sales the model conceptualizes the impact of customer acceptance of a direct channel the degree to which customers accept a direct channel as a substitute for shopping at a traditional store on supply chain design the customer acceptance of a direct channel can be strong enough that an indepent manufacturer would open a direct channel to compete with its own retailers here direct marketing is used for strategic channel control purposes even though it is inefficient on its own and surprisingly it can profit the manufacturer even when so direct sales occur specifically we construct a price setting game between a manufacturer and its independent retailer direct marketing which indirectly increases the flow of profits through the retail channel helps the manufacturer improve overall profitability by reducing the degree of inefficient price double marginalization while operated by the manufacturer to constrain the retailer s pricing behavior the direct channel may not always be detrimental to the retailer because it will be accompanied by a wholesale price reduction this combination of manufacturer pull and push can benefit the retailer in equilibrium finally we show that the mere threat of introducing the direct channel can increase the manufacturer s negotiated share of cooperative profits even if price efficiency is obtained by using other business practices

impact of product pricing and timing of investment decisions on supply chain co opetition abstract in supply chain co opetition firms simultaneously compete and co operate in order to maximize their profits we consider the nature of co opetition between two firms the product supplier invests in the technology to improve quality and the purchasing firm buyer invests in selling effort to develop the market for the product before uncertainty in demand is resolved we consider three different decision making structures and discuss the optimal configuration from each firm s perspective in case 1 the supplier invests in product quality and sets the wholesale price for the product the buyer then exerts selling effort to develop the market and following demand potential realization sets the resale price in case 2 the supplier invests in product quality followed by the buyer s investment in selling effort then after demand potential is observed the supplier sets the wholesale price and the buyer sets the resale price finally in case 3 both firms simultaneously invest in product quality and selling effort respectively subsequently observing the demand potential the supplier sets the wholesale price and the buyer sets the resale price we compare all configuration options from both the perspective of the supplier and the buyer and show that the level of investment by the firms depends on the nature of competition between them and the level of uncertainty in demand our analysis reveals that although configuration 1 results in the highest profits for the integrated channel there is no clear dominating preference on system configuration from the perspective of both parties the incentives of the co opetition partners and the investment levels are mainly governed by the cost structure and the level of uncertainty in demand we examine and discuss the relation between system parameters and the incentives in desiging the supply contract structure

double sided moral hazard and the nature of share contracts contractual arrangements involving revenue profit sharing are often based on fairly simple often linear rules in addition in many contexts these contracts are not finely adjusted to the particular circumstances of individual agents or markets nor do they vary over time to the extent current theories based on optimal contracting suggest they should we develop a simple model of such revenue or profit sharing arrangements based on double sided moral hazard and show that this model can account for many of these stylized facts more specifically the model shows that linear contracts can be optimal and that benefits from customizing terms can in some cases be quite limited if not zero

an industry equilibrium analysis of downstream vertical integration this paper investigates the effect of product substitutability on nash equilibrium distribution structures in a duopoly where each manufacturer distributes its goods through a single exclusive retailer which may be either a franchised outlet or a factory store static linear demand and cost functions are assumed and a number of rules about players expectations of competitors behavior are examined it is found that for most specifications product substitutability does influence the equilibrium distribution structure for low degrees of substitutability each manufacturer will distribute its product through a company store for more highly competitive goods manufacturers will be more likely to use a decentralized distribution system this article was originally published in marketing science volume 2 issue 2 pages 161 191 in 1983

an empirical look at franchising as an organizational form franchise contracts are identified as a hybrid form of economic organization motives for the dominance of franchise arrangements are identified by examining the theoretical literature on franchising and related literatures on the theory of the firm firm growth managerial and employee selection a nd brand name capital empirical tests are performed on the incidence of franchise contracts across states for three industries in which f ranchising is prominent and data are readily available the results s uggest that both principal agent incentives and informational incenti ves favor the use of franchise arrangements copyright 1988 by the university of chicago

conditions of reverse bullwhip effect in pricing under joint decision of replenishment and pricing abstract a reverse bullwhip effect in pricing rbp occurs when an amplification of price variability takes place moving from the upstream suppliers to the downstream customers in a supply chain in this study we investigate rbp conditions for supply chains where joint replenishment and pricing decisions are made commencing with a single stage supply chain in which a retailer faces a random and price sensitive demand we extend the results to a multi stage supply chain using a leader follower game theoretical framework we discuss rbp conditions for supply chains where newsvendor and continuous review inventory policies are employed and present numerical examples for commonly used demand functions

double moral hazard and resale price maintenance incentives for resale price maintenance rpm are studied in a wholesaler retailer relationship in which both firms make a nonprice choice subject to moral hazard the best attainable contract has vertical externalities in both nonprice choices and the choice of consumers price if delegated to the retailer rpm controls the latter externality but interacts with the other externalities as well as a consequence either minimum or maximum vertical price fixing can be optimal in spite of a successive monopoly specification similar incentives exist for writing other variables into contract such as the capital input of the retailer

the effects of new franchisor partnering strategies on franchise system size many young firms use strategic actions to attract partners who help them increase the size of their operations quickly this article examines the use of strategic actions to attract partners and increase system size in the context of franchising we build on research in entrepreneurship marketing organization theory strategic management and finance to develop specific hypotheses about the influences of franchisor pricing policy and strategic control decisions on system size we test these hypotheses empirically using panel data on a sample of 1 292 business format franchise systems from 152 industries that were established in the united states between 1979 and 1996 and followed from their inception forward in time our model accounts for the endogeneity of strategic decisions controls for unobserved firm and industry factors and accounts for selection effects due to system failure the results show that franchisors that grow larger 1 lower royalty rates as the systems age 2 have low up front franchise fees that rise over time 3 own a small proportion of outlets and lower that percentage over time 4 keep franchisees initial investment low and 5 finance their franchisees

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

percentage rent contracts between co stores abstract high rental rates and space scarcity in popular retail areas are encouraging retailers to share available space creating co stores co stores with complementary products enjoy a boost in foot traffic thus higher sales when the space is owned by one a common practice for retailers is to engage in a revenue sharing agreement we study the optimal design of a percentage rent contract between two co stores each having his her own random sales dependent on effort levels of both retailers since the effort level exerted by a retailer is often unverifiable it results in a double moral hazard problem we show that a linear percentage rent which is composed of a sales share and a based rent achieves the second best effort levels the landlord may also find it optimal to set a fixed rent by setting the sales share to zero with cobb douglas sales and power disutility of effort functions we obtain closed form expressions for the optimal contract we show that the landlord charges a high sales share for a tenant with low demand externality and a high sales scale the landlord is better off renting out space to a small but high revenue generating retailer rather than one generating larger traffic but with lower sales scale when the landlord s externality potential is low but he is successful in generating sales optimal sales share is low but the base rent is high the percentage rent can increase the landlord profit by up to 13 compared to the conventional fixed rent

organizational choices and performance in distribution systems this article studies the performance of distribution networks as the result of a range of organizational choices the analytical part of the article surveys the vast literature devoted to franchising and dual distribution from this framework several testable propositions linking network performance to organizational choices are derived three complementary criteria of performance are taken into account the internationalization rate the expansion rate and the market share this article provides evidence for the simultaneity between these performance criteria analytically related as indicators of the network commercial performance thus the econometrical model is defined as a system of simultaneous equations free of endogeneity regarding the explanatory variables the estimations on recent french data obtained using the three stage least squares method provide robust results and show that the type of distribution network the number of company owned outlets in the network the type of sector and the

integration of capacity pricing and lead time decisions in a decentralized supply chain abstract we consider a decentralized supply chain consisting of a supplier and a retailer facing price and lead time sensitive demand the decision process is modelled by a stackelberg game where the supplier as a leader determines the capacity and the wholesale price and the retailer as a follower determines the sale price and lead time the equilibrium strategy of these two players is obtained by comparing with the performance of the corresponding decentralized chain without capacity decision as a benchmark we characterize the impact of capacity decision on the players profit i e the supplier s profit may be always significantly increased while the retailer s profit is only increased when the capacity is underestimated in the benchmark model further we demonstrate that the integration of capacity decision can also significantly reduce the profit loss caused by double marginalization finally we find that the revenue sharing and two part tariff contracts cannot coordinate the decentralized channel instead we propose a franchise contract with a contingent rebate that can achieve channel coordination and a win win outcome

demand signalling under unobservable effort in franchising linear and nonlinear price contracts we study the signalling strategy of a principal who is privately informed about its high demand potential to an uninformed risk neutral agent we analyze the model in the context of a contract between a franchisor and a franchisee we examine the distortions of a two part pricing scheme necessary to credibly inform the franchisee agent we also study whether the inability of the franchisor principal to observe the agent s effort moderates or exaggerates the distortions from the first best two part pricing scheme a surprising outcome is that even though the principal incurs greater signalling cost the magnitude of distortion in the two part scheme is smaller when service is unobservable than when it is not thus a signalling strategy employing the fixed and variable fees is harder to detect under moral hazard empirical studies failing to control for moral hazard may incorrectly conclude that signalling strategy does not occur we later consider a three part scheme to verify whether or not the schem

comment managing channel profits comment in a recent paper in this journal jeuland and shugan jeuland a s shugan 1983 managing channel profits marketing sci 2 summer 239 272 proposed a quantity discount schedule as a way of coordinating a channel as they put it on p 253 of their paper a quantity discount schedule which would fix the retailer s and hence the manufacturer s profits to some fixed linear function of total channel profits would lead the channel to maximize profits the purpose of this note is to show that a quantity discount schedule is not necessary for channel coordination

comarketing alliances should you contract on actions or outcomes comarketing alliances often involve multiple partners and a given partner s marketing efforts on behalf of the alliance can indirectly affect the demand of the other partners individual partners however can ignore the effects of such an externality and invest suboptimally to the detriment of the alliance this paper examines the relative effectiveness of outcome and action based contracts in providing the alliance partners with the incentives to invest appropriately we develop a mathematical model in which a focal firm e g sony contracts with two partners e g mcdonald s and old navy when each of these partners is privately informed about the impact of the alliance on its demand our analysis evaluates the strengths and weaknesses of outcome or output and action based or input based contracts in settings with varying levels of the demand externality we find that when there is either no externality or a relatively weak positive externality there is a strict preference for output based contracts that preference however is reversed with a sufficiently strong positive externality this paper explains the underlying rationale for these findings this paper was accepted by preyas desai marketing

the choice of organizational form the case of franchising abstract we examine companies that franchise some units and centrally operate own others the agency problems confronting these two organizational forms are analyzed testable hypotheses are developed the empirical results support the notion that owning versus franchising reflects a trade off among agency related problems the cost of monitoring store managers appears to be especially important in the own franchise decision the level of repeat business and initial investment requirements per unit also appear to be important

econometric analysis of aggregation in the context of linear prediction models this paper deals with the problem of aggregation where the focus of the analysis is whether to predict aggregate variables using macro or micro equations the grunfeldgriliches prediction criterion for choosing between aggregate and disaggregate equations is generalized to allow for contemporaneous covariances between the disturbances of micro equations and the possibility of different parametric restrictions on the equations of the disaggregate model a new test is proposed of the hypothesis of perfect aggregation which tests the validity of aggregation either through coefficient equality or through the stability over time of the composition of the regressors across the micro units the tools developed in the paper are then applied to employment demand functions for the uk economy disaggregated by 40 industries firstly a set of unrestricted log linear dynamic specifications are estimated for the disaggregate equations and then linear parameter restrictions are imposed as appropriate corresponding unrestricted and restricted aggregate equations are estimated two different levels of aggregation are considered aggregation over the 23 manufacturing industries and aggregation over all 40 industries of the economy in both cases the hypothesis of perfect aggregation is firmly rejected for the manufacturing industries the prediction criterion marginally favors the aggregate equation but over all industries the disaggregated equations are strongly preferred

implementing supplier codes of conduct in global supply chains process explanations from theoretic and empirical perspectives western buying companies impose supplier codes of conduct scc on their suppliers in developing countries however many suppliers cannot fully comply with scc and some of them even cheat in scc in this research we link contract characteristics price pressure production complexity contract duration to the likelihood of supplier s commitment to scc through a mediating process how the buying companies govern their suppliers our structural equation model analysis shows that the hierarchy relational norms governance is a perfect mediator of contract characteristics effects on the likelihood of supplier s commitment the market governance an insignificant one the managerial implications are provided for successfully implementing scc in global supply chains

some empirical support for the heckscher ohlin model of production this paper develops empirically feasible tests of the production side of the heckscher ohlin model of international trade in the case where factor prices are not equal between countries to allow for factor price differences across industries within each country three variants of the model are considered tests of these variants are implemented for canada and the united states results are favourable to all three variants especially the variant that allows imperfect factor mobility within each country thus the paper finds some support for the heckscher ohlin model of production support empirique pour le modele de production heckscher ohlin ce memoire developpe des tests empiriques realisables de l aspect production du modele heckscher ohlin de com merce international dans l hypothese que les prix des facteurs de production ne sont pas egaux entre pays on considere trois variantes du modele permettant des diff6rences entre les facteurs de production a l interieur de chaque pays des tests de ces variantes sont calibres pour le canada et les etats unis les resultats supportent les trois variantes mais specialement celle qui postule une mobilite imparfaite des facteurs de production a l interieur de chaque pays donc le memoire donne un support empirique au modele de production heckscher ohlin

strategic interactions in traditional franchise systems are franchisors always better off abstract the effects of price competition and advertising spillover on franchisees decision to cooperate and on franchisor s contractual preferences are investigated we show that the franchisees decision to cooperate or not depends on the type of franchise contracts under exclusive territory contracts any mode of play between franchisees give the same profits to the franchisees and franchisor contracts that allow price competition and well targeted local advertising offer a good ground for horizontal cooperation which may or may not benefit the franchisor depending on whether the prices are strategic substitutes or strategic complements contracts in which price competition is allowed and the burden of advertising decisions is totally transferred to the franchisor lead to cooperation between franchisees at the expense of the franchisor franchisees do not cooperate to the benefit of the franchisor if local advertising is predatory and price competition is not allowed in the contract but franchisees are given the responsibility to undertake local advertising also the franchisor endorses cooperation between franchisees when local advertising has a public good nature but such a cooperation may never occur when the impact of local advertising on demand is significant we finally show that while some contracts always dominate others the choice of a franchise contract may also depend on local competition and or the franchise goodwill

competition and cooperation in marketing channel choice theory and application this paper discusses the problem of choosing a vertical marketing channel in a product differentiated duopolistic market firms choose product price and the form of the marketing channel to maximize profits it is shown that integration of the marketing function results in greater price competition and lower prices than does the use of independent marketing middlemen the profitability of reducing price competition by using such middlemen is investigated two hypotheses that integration is negatively associated with the products substitutability and that symmetric channel structures are stable are tested in a preliminary way and supported with survey data from the international semiconductor industry

an empirical analysis of territorial encroachment within franchised and company owned branded chains franchisees within large branded chains loudly complain of a form of channel conflict known as encroachment or impact encroachment occurs when franchisors add new units of their brand proximately to their franchisees existing units franchisees claim that their revenues have substantially decreased as a result of encroaching same brand entry the topic of encroachment has not only dominated franchisee association agendas and trade journal headlines but has also become a hot topic for politicians and policymakers yet until now evidence of encroachment has been strictly anecdotal this paper provides the first systematic evidence of encroachment using revenue data from the texas lodging industry in the 1990s i find that when franchisors approve new same brand units in the vicinity of incumbent units these new units cannibalize the incumbents revenues in contrast to the result for franchisors the addition of a new unit by company owned brands in the vicinity of same brand units is associated with an increase in the incumbents revenues this contrast suggests that encroaching behavior is caused by incentives that result from the governance form of franchising and is not simply an outcome that accompanies all expansion this finding informs theory on governance forms and exclusive territories implications for practitioners and policy are also discussed