Completing contracts ex post: How car manufacturers manage car dealers
AbstractThis article illustrates how contracts are completed ex post in practice and, in so doing, indirectly suggests what the real function of contracts may be. Our evidence comes from the contracts between automobile manufacturers and their dealers in 23 dealership networks in Spain. Franchising dominates automobile distribution because of the need to decentralize pricing and control of service decisions. It motivates local managers to undertake these activities at minimum cost for the manufacturer. However, it creates incentive conflicts, both between manufacturers and dealers and among dealers themselves, concerning the level of sales and service provided. It also holds potential for expropriation of specific investments. Contracts deal with these conflicts by restricting dealers’ decision rights and granting manufacturers extensive completion, monitoring and enforcement powers. The main mechanism that may prevent abuse of these powers is the manufacturers’ reputational capital.
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Bibliographic InfoPaper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 267.
Date of creation: Sep 1998
Date of revision: Jul 2004
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Web page: http://www.econ.upf.edu/
Franchising; incomplete contracts; self-enforcement; automobile;
Other versions of this item:
- Arruñada Benito & Garicano Luis & Vázquez Luis, 2005. "Completing Contracts Ex Post: How Car Manufacturers Manage Car Dealers," Review of Law & Economics, De Gruyter, vol. 1(1), pages 149-173, April.
- L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
- L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
- L62 - Industrial Organization - - Industry Studies: Manufacturing - - - Automobiles; Other Transportation Equipment
- L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce
- K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
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