uncertainty and disagreement in economic prediction the bank of england survey of external forecasters this article introduces a new source of survey data namely the bank of england survey of external forecasters the survey collects point and density forecasts of inflation and gdp growth and hence offers the opportunity of constructing direct measures of uncertainty we present a simple statistical framework in which to define and interrelate measures of uncertainty and disagreement the resulting measures are compared with other direct measures of uncertainty nationally and internationally a significant sustained reduction in inflation uncertainty followed the 1997 granting of operational independence to the bank of england to pursue a monetary policy of inflation targeting

contractual design and networks performance empirical evidence from franchising this article deals with the links between networks performance and the design of vertical contracts it provides evidence broadly consistent with the hypothesis that within franchising systems constraining contracts for the retailers favour a better performance at the network level

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

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

a noncooperative analysis of hotelling s location game abstract we study the location equilibrium in hotelling s model of spatial competition as d aspremont et al have shown with quadratic consumer transportation cost the two sellers will seek to move as far away from each other as possible we show that the location game possesses an infinity of mixed strategy nash equilibria in these equilibria coordination failure invalidates the principle of maximum differentiation and firms may even locate at the same point journal of economic literature classification numbers c72 d43 l11

franchising liquidity constraints and entry the short and long run incentives to franchise are considered while monitoring problems due to geographic dispersion ensure that franchising is an efficient organizational form in the long run entry costs suggest that franchising is an efficient solution to the formidable problems posed by entry in the short run this explains the intensive use of franchising in the early growth stages followed by a greater proportion of company owned outlets as the system matures

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

interest rates and the subjective probability distribution of inflation forecasts the interst rate effects of the first four moments of the subjective probability distribution of inflation forecasts from the asa nber survey are examined over the period 1968 4 1985 4 using tre asury bill yields as the nominal rate variable in the context of a re duced form fisher equation the authors find that inflation uncertain ty as measured by the average variance of the probability distributi ons of inflation forecasts to be insignificant however the average skewness and kurtosis variables which result from these probability distributions do significantly affect interest rates they interpret these effects as accounting for the level of risk or uncertainty abou t future inflation copyright 1988 by ohio state university press

a theory of ambiguity credibility and inflation under discretion and asymmetric information this paper develops a positive theory of credibility ambiguity and inflation under discretion and asymmetric information the monetary policymaker maximizes his own politically motivated objective function that is positively related to economic stimulation through monetary surprises and negatively related to monetary growth the relative importance he assigns to each target shifts stochastically through time his current preference trade off is known to him but not to the public when choosing the state contingent path of money growth for the present and the future the policymaker compares the benefits from current stimulation with the costs associated with higher future inflation expectations current monetary growth conveys information to the public about future money growth because there is persistence in the policymaker s objectives although expectations are rational information is imperfect because monetary control procedures are imprecise as a result the public cannot correctly distinguish persistent changes of emphasis on different policy objectives from transitory monetary control errors the public becomes aware of changes gradually by observing past monetary growth credibility is defined in terms of the speed with which the public recognizes changes in the objectives of the policymaker credibility is lower the noisier monetary control and the more stable the objectives of the policymaker looser monetary control and a higher degree of time preference on the part of the policymaker induce him to produce higher and more variable monetary growth when the policymaker is free to determine the accuracy of monetary control he does not always choose the most effective control available in spite of the fact that monetary surprises always have an expected value of zero the reason is that ambiguous control procedures enable the policymaker to generate positive surprises when he cares more than on average about economic stimulation he leaves the inevitable negative surprises for periods in which he cares more about inflation prevention this result provides an explanation for the fed s preference for ambiguity recently documented by goodfriend 1986 the policymaker is more likely to pick more ambiguous control procedures the more uncertain his objectives and the higher his time preference the paper also provides a theoretical underpinning for the well documented crosscountry positive correlation between the level and the variability of inflation

agency theory and franchising some empirical results this article provides an empirical assessment of various agency theoretic explanations for franchising including risk sharing one sided moral hazard and two sided moral hazard the empirical models use proxies for factors such as risk moral hazard and franchisors need for capital to explain both franchisors decisions about the terms of their contracts royalty rates and up front franchise fees and the extent to which they use franchising in this article i exploit several new sources of data on franchising to construct a cross section of 548 franchisors involved in various business activities in the united states in 1986 the data are most consistent with a model based on two sided moral hazard the empirical models are also more successful at explaining the extent to which franchisors choose to franchise stores than at explaining the terms of franchise contracts finally contrary to the predictions of several theoretical models i find that royalty rates and franchise fees are not negatively related

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

multimodality and mixture distributions an application to a survey of economic expectations in this article we present the silverman multimodality test and mixture distributions methodology applying both approaches to the survey of economic expectations of the central bank of chile the main results reflect the importance of a permanent monitoring of the complete distributions and not just central tendency meausures as is the practice in many central banks currently we find that the forecasts of the private professional forecasters have systematically been in line with the inflation targeting range although during episodes where the effective inflation proved to be outside the target range

costs of control the source of economic rents for mcdonald s franchisees the main purpose of this article is to establish empirically using financial data that there are both ex ante and ex post rents left downstream at mcdonald s we find that the present value of the ex ante rents is around 300k 455k 1982 dollars ex post rents are of course even larger we argue that the ex post rents represent an incentive mechanism that complements the use of profit sharing rights at mcdonald s we also argue that ex ante rents arise here because franchisees wealth constraints prevent the up front extraction of the full present value of the ex post rents finally we note that mcdonald s desire for a particular type of individual to operate its franchises namely owner operators whose livelihoods are tied to the success of their outlets increases the likelihood that downstream operators face liquidity constraints this in turn contributes to the need for mcdonald s to leave ex ante rents downstream

mixed strategy equilibria in a quality differentiation model abstract this paper shows that the standard quality differentiation duopoly model has in addition to the two well known pure strategy equilibria of maximum quality differentiation an infinity of mixed strategy equilibria in which firms choose mixed strategies in the first stage quality game in these equilibria maximum quality differentiation does not occur due to coordination failure total expected consumer surplus is the same at all mixed strategy equilibria and is higher than that under either pure strategy equilibrium total expected industry profit is the same at all mixed strategy equilibria and is lower than that under either pure strategy equilibrium

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

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

strategic choice of quality when quality is costly the persistence of the high quality advantage in a two firm two stage model of vertical product differentiation i show that for every convex fixed cost function of quality the firm that chooses the higher quality at the first stage earns the higher profits the result holds for the pure strategy equilibrium in the simultaneous quality game and it holds as well if firms choose their qualities in sequential order

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

franchising and risk management franchising is an important and controversial form of vertical integration allegations of opportunistic behavior by franchisors have led to calls for public regulation and in some states fairness in franchising laws the advisability of such regulation depends on the long run incentives to franchise if franchising is a temporary step on the path to complete ownership integration regulation may be called for alternatively if complete or partial franchising is a permanen t market solution regulation is at least contestable this paper offer s new evidence on the incentives to franchise copyright 1988 by american economic association

franchising agency problems and the cost of capital explanations for franchising are examined in the context of the us hotel industry the study is distinct from previous research on franchising because it explicitly recognizes the existence of three organizational forms whereas previous research has focused exclusively on two of these three forms the two organizational forms examined in previous work are franchising and company ownership the additional organizational form is company management investor ownership which involves management by the franchisor and ownership by outside investor groups a plausible explanation for the existence of the last organizational form is based on the availability of low cost capital from non chain sources

agency and institutional influences on franchising decisions abstract while the franchising literature has typically relied on agency theory efficiency considerations may not fully explain decisions to expand through franchising or company ownership in this study i re examine franchising decisions using insights from institutional theory the key tenet of institutional theory is that decisions are influenced by isomorphic pressures arising from the environment economic rationales such as the achievement of efficiency are thought of as less pervasive concerns i begin by investigating whether institutional theory explains variance in franchising decisions beyond what is explained by agency theory then i explore the extent to which institutional considerations moderate the relationships between agency considerations and franchising decisions hypotheses are tested on a unique database of 132 french franchise chains empirical results suggest that successful competitors use of franchising explains variance in the focal chain s use of franchising beyond what is explained by the importance of local managerial inputs and the threat of franchisee opportunism in addition the threat of franchise opportunism is less strongly related to the focal chain s use of franchising when successful competitors have a high proportion of franchised outlets overall findings from this study suggest that researchers should supplement agency theory with institutional theory to adequately explain franchising decisions

incentive conflicts and contractual restraints evidence from franchising abstract this study uses agency theory to develop testable implications about three provisions commonly observed in franchise contracts 1 restrictions on passive ownership 2 area development plans and 3 mandatory advertising expenditures the primary hypothesis is that these provisions are most likely when there are significant externalities among the units within the franchise system the evidence based on a large sample of franchise contracts is generally consistent with this hypothesis the evidence also suggests that these incentive instruments are complements in contrast to the theory most of the results do not support the hypothesis that the percentage of company owned units is related to externalities within the system franchisee risk aversion and or wealth constraints appear more important while the study focuses on franchising the results provide insights into related provisions in other contracts

the tenuous trade off between risk and incentives empirical work testing for a negative trade off between risk and incentives has not had much success the data suggest a positive relationship between measures of uncertainty and incentives rather than the posited negative trade off i argue that the existing literature fails to account for an important effect of uncertainty on incentives through the allocation of responsibility to employees when workers operate in certain settings firms are content to assign tasks to workers and monitor their inputs by contrast when the situation is more uncertain they delegate responsibility to workers but to constrain their discretion base compensation on observed output

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

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

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

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

an empirical study on contractual heterogeneity within the firm the vertical integration franchise contracts mix this paper tests a discrete choice model on the mix of franchised and company owned outlets contractual heterogeneity within the firm this is often explained by the existing literature as due to heterogeneous characteristics of the outlets however correspondence between outlets and contracts characteristics is not often observed in reality an explanation is proposed which suggests that contract mixing is driven by the contractual choice of both principal and agents and that heterogeneous agents will choose contracts that match their characteristics this hypothesis is supported by econometric results based on outlet level microdata collected by means of a survey of uk firms

a comment on a model of vertical product differentiation in a duopoly model with vertical differentiation if the firms do not cover the market the lower quality firm chooses a quality level exactly 4 7 of that of the higher quality firm and chooses a price that is 2 7 of the price of the higher quality firm copyright 1992 by blackwell publishing ltd

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

a heterogeneous model of disposition effect a portfolio choice model is provided to illustrate the disposition effect under irrational belief in mean reversion assumption higher cognitive reference stronger irrational belief in mean reversion magnitude and less risk aversion all strengthen the disposition effect in the model the equilibrium market interest rate is priced after the market clearing condition is employed the grater disposition effect reduces the capital mobility from the stock market to the bond market and thus mitigates the dropping of the market interest rate

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

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

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

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

an empirical analysis of a firm s decision to franchise abstract hypotheses from monitoring and search cost explanations for the existence of franchising are discussed and tested the evidence offers strong support for the search theory somewhat weaker support for the monitoring shirking theory and no support for the monitoring cheating hypothesis

moral hazard competition and contract design empirical evidence from managerial franchised and entrepreneurial businesses in norway agency theory emphasizes the role of ownership control and incentives in encouraging managers to improve efficiency owners often tie managers to contracts that reduce conflict of interest between owners and managers the differences between alternative business ownership structures have been investigated according to theory we expect managers with an outcome dependent dealer contract to be more efficient than managers with a more integrated and less performance based employee dealer contract we also analyse how competitive pressure might reduce the moral hazard problem and therefore affect contract design berle and means the modern corporation and private property macmillan new york 1932 long ago stated that the market mechanism could constrain the agency problem even so this problem has scarcely been investigated empirically this paper also considers the contractual effect of potential monitoring costs education and relationship age in a model tested on data from 175 dealer contracts in a

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

ownership agency and wages an examination of franchising in the fast food industry this paper estimates the difference in compensation between company owned and franchisee owned fast food restaurants the contrast is of interest because contractual arrangements give managers of company owned outlets less of an incentive to monitor and supervise employees estimates based on two data sets suggest that employee compensation is slightly greater at company owned outlets than at franchisee owned outlets the earnings gap is 9 percent for assistant and shift managers and 2 percent for full time crew workers furthermore the tenure earnings profile is steeper at company owned restaurants these findings suggest that monitoring difficulties influence the timing and generosity of compensation

to franchise or not to franchise an analysis of decision rights and organizational form shares abstract for innovators and entrepreneurs in service businesses franchising is frequently suggested as a way to succeed and grow academic research has provided little guidance for potential franchisors however this article provides a model to guide that choice of organizational form using results from agency theory analytically franchising is a way to allocate decisions within the franchise system between the franchisor and the franchisee in order to promote efficiency and provide incentives franchisees make decisions regarding local operations such as hours prices and locations because they have the knowledge about local trading conditions franchisors make decisions regarding the product its production and associated marketing efforts that together create the standardization that the trademark signals the revenue of franchise systems is divided to provide incentives to each party to support the allocation of decisions franchisors receive a percentage of gross sales typically 5 to compensate them for use of the trademark and associated services franchisees keep the unit s profits after paying royalties these profits motivate the franchisee to make the good decisions that operate the unit efficiently but franchising has limitations as well first by making franchisees invest in a unit in a specific geographic area the franchise system exposes the franchisees to business risk it consists of local economic conditions beyond franchisees control that could reduce or eliminate their capital that risk could be eliminated by owning a geographically diversified portfolio of shares of units in different places but then incentives are weakened second the requirements of standardization under the common trademark constrain franchisees from the full use of their human capital including their knowledge of local conditions some adaptations to the local market are prohibited by the requirement of standardization so high levels of either business risk or human capital in an industry make franchising a less desirable choice of organizational form these ideas are tested with interindustry data using an econometric discrete choice model on the share of sales through franchise systems termed organizational form share the methodology is identical to market share models used in economics and marketing business risk as measured by percent of units that have failed in the industry in the last 3 years and human capital required in the industry as measured by average wages paid both negatively influence the share of sales through franchise systems the model can be applied by entrepreneurs considering franchising especially in industries not traditionally associated with franchising using public data sources identified in the study a prospective franchisor can research the industry to determine if industry conditions support franchising as the optimal choice of organizational form the empirical texts also suggest a second managerially relevant conclusion the decision of should we franchise can be and should be separated from the decision of how do we implement franchising factors previously shown to influence the implementation of franchising the degree of ownership of units within the system do not influence organizational form share thus suggesting that the strategic decision of whether to franchise is distinct from the operating decision of how to implement franchising

are business startups debt rationed using a large random sample of u k start ups and a rich data set the paper demonstrates that human capital is the true determinant of survival and that the correlation between financial capital and survival is spurious provision of finance is demand driven with banks supplying funds elastically and business requests governing take up firms self select for funds on the basis of the human capital endowments of the proprietors with better businesses more likely to borrow a reason why others have seemingly identified start up debt gaps may be the failure to test a sufficiently rich empirical model copyright 1996 by royal economic society

consensus and uncertainty in economic prediction we define consensus as the degree of agreement among point predictions aimed at the same target by different individuals and uncertainty as the diffuseness of the corresponding probability distributions this distinction is made operational with the aid of the nber asa survey data on matched point and probabilistic forecasts of inflation and the rate of change in gross national product the means of the two sets of forecasts agree closely standard deviations of point forecasts tend to understate uncertainty as measured by standard deviations of the predictive probability distributions however these measures of consensus and uncertainty are on the whole positively correlated there is evidence that expectations of higher inflation generate greater uncertainty about inflation tests also favor the hypothesis that a rise in inflation uncertainty has adverse effects on real growth

on production costs in vertical differentiation models abstract we analyze the effects of the introduction of a unit production cost in a vertical differentiation model with fixed costs of quality improvement for a low high unit cost a rise in cost reduces increases product differentiation and prices

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

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