This study examines how much, if any, of the differences in retail gasoline prices between markets is attributable to differences in the composition of vertical contract types at gasoline stations in each market. The purchase of the independent retail gasoline chain, Thrifty, by ARCO provides a unique opportunity to examine the effects of changes in different vertical contract types on local retail prices. This event caused sharp changes in the market share of i) fully vertically integrated stations, and ii) independent stations; differentially affecting local markets in the Los Angeles and San Diego Metropolitan areas. Using unique and detailed station-level data, this study examines how these sharp changes affected local retail prices. The detailed data and the research design based on the Thrifty station conversions allow for credible estimation of the effects of the market share of independent retailers and vertically integrated retailers on local market prices, controlling for any omitted factors at the station level, and the city level over time. Results indicate that a decrease in the market share of independent stations has a significant positive impact on local retail price. However, a change in the market share of refiner owned and operated branded stations does not have a significant impact on local market price. These results have important implications as policy makers consider the regulation of vertical contracts as a means to increase competition in gasoline markets. The research design and detailed data also allow for inference on the underlying nature of retail gasoline competition.

Agency theory implies that asset ownership and decision authority are complements. Using 1998 data from Texas commercial banks, we test whether the likelihood of local ownership of bank offices increases with the importance of granting local managers greater decision authority (for example, due to location or customer base). Our empirical evidence is consistent with this hypothesis. It suggests that complementarities between strategy and organizational structure can foster differentiation among firms in terms of location, customers, and products. It also supports the growing view that small locally-owned banks have a comparative advantage over large banks within specific environments.

The "raising rivals' costs" literature predicts that vertically integrated firms have an incentive to generate profits in downstream markets by increasing wholesale prices to competing retailers. We test this theory using data on wholesale gasoline prices. The 1997 acquisition of Unocal's West Coast refining and marketing assets by Tosco Corporation generated discrete and differential changes in the extent of Tosco's vertical integration into thirteen West Coast metropolitan areas. This event permits identification of the price effects of vertical integration, controlling for the effects of horizontal market structure, cost shocks and trends, and potentially confounding city-specific covariates. We find

This paper explores the relationship between the structure of the market for the rening and distribution of gasoline and the wholesale price of unbranded gasoline sold to independent gasoline retailers.

Using a proprietary dataset provided by a major manufacturer of aircraft engines, we empirically investigate the impact of incentives present in after-sales repair and maintenance support contracts on product reliability. In particular, we compare the reliability of products under time and material contracts (T&MC), which have been used traditionally in the aerospace industry, with the reliability under performance-based contracts (PBC), which are gaining wide acceptance. Adverse selection of customers into contract types, and consequently the endogeneity of contract choice, is explicitly modeled by means of a two-stage econometric model. After controlling for this selection process, we find evidence for the positive and significant effect of performance incentives created by PBC on product reliability. We test this hypothesis using a number of reliability proxies, alternative model specifications, and we perform a number of robustness checks. Our estimates indicate an improvement of product reliability in the 20-40% range under PBC, compared to the reliability observed under T&MCs. Our research provides a valuable input into the ongoing policy debate about the effectiveness of performance-based maintenance contracts which are currently being introduced extensively in both the government and the private sectors. 1

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In this study I analyze the implications of contractual innovation in verticallyseparated industries, using the example of the video rental industry. Prior to 1998, video stores obtained inventory from movie distributors using fixed-fee contracts. In 1998, revenue-sharing contracts, which include inventory restrictions, were widely adopted. I investigate the effect of using revenue-sharing contracts on firms ’ profits and consumer welfare, relative to fixed-fee contracts. I analyze a new panel dataset of home video retailers that includes information on individual retailers ’ contract and inventory choices, weekly rentals and sales, and contract terms (prices and quantity restrictions) for 1,114 movie titles and 6,594 retailers in the U.S during each week of 1998 and 1999. A structural econometric model of firms ’ behavior is developed and estimated, and counterfactual experiments are performed. The results indicate that total upstream and downstream profits increase by seven percent, and consumers benefit substantially when revenue-sharing contracts are adopted. I also examine the effects of the observed quantity restrictions. I find that these restrictions serve to increase profits for upstream firms and decrease profits for downstream firms, relative to revenue-sharing contracts without inventory restrictions.

This paper compares the financial performance of a sample of 250 car distributors organized either as independent dealerships or as subsidiaries directly owned by manufacturers. We test if independently owned dealerships, in which there is less separation between ownership and control, provide better incentives for local management. We observe that average profitability of independent dealerships is 21.63 per cent higher than that of company-owned outlets. Labor productivity is also 7 per cent higher, whereas average labor cost is 15.31 per cent lower. Controlling for market variables and other possible causes does not change the difference in profitability and only slightly reduces the differences in the other indicators. The creation of company-owned outlets, in spite of their apparent lower profitability, is explained in an agency framework as a way of containing agents ’ opportunism, including the cost related to ‘inefficient ’ allocation of risk.

University, l'Université de Rennes I, and Pennsylvania State University for their helpful comments and suggestions. We also thank Wendy Petropoulos and Robert Picard for their invaluable assistance. The usual caveat applies. Preliminary and incomplete: Please do not cite without permission This paper uses an extensive panel data set to explore how franchised chains choose their extent of company ownership and how this changes over time. Consistent with existing literature, we find that there is a significant decline in the proportion of company-owned units during the first few years after a firm becomes involved in franchising. However, we show that this decline simply occurs because firms are all basically 100 % company owned by definition when they first start franchising. We proceed to demonstrate that after these initial years of decline, the percent of total outlets that are company-owned is remarkably stable within firms over time. However, this “stable ” proportion of company ownership varies significantly across firms. In examining factors that explain the variation in this “targeted ” level of direct control, we find important sectoral differences that we believe reflect differences in the monitoring and production technologies available in these different types of businesses. We also find, however, that the targeted level of company ownership varies considerably across firms even within

Locational choice and price competition: Some empirical results for the Austrian retail gasoline market