Correlated Contracts in Oligopoly

Esther Gal-Or ()

International Economic Review, 1995, vol. 36, issue 1, 75-100

Abstract: The author considers a market that consists of two competing franchise systems and focuses attention on franchise agreements that specify the payment of the franchisees as a quantity contingent nonlinear price schedule. At the equilibrium, the schedule of wholesale prices reflects both an 'informational' and a 'strategic' component, where the informational component is weakened if the unit costs of competing franchisees are correlated. One of the multiple equilibria that exist with correlation enables each franchiser to extract the complete producer surplus. Franchisers may prefer, however, other equilibria where franchisees can earn positive informational rents. Copyright 1995 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Date: 1995
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