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Vertical Restraints and the Law: Evidence from Automobile Franchising

Listed author(s):
  • Giorgio Zanarone
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    After a 2002 European Commission regulation prohibited the use of dealer-exclusive territories, automobile franchise contracts in Italy introduced price ceilings and standards on verifiable marketing and service inputs, such as advertising and salespeople. The contracts also imposed quantity floors, a practice already in use before the regulatory change. The introduction of standards suggests that, consistent with a view of vertical restraints as coordination mechanisms, manufacturers used exclusive territories to induce desired dealer services, and, once the use of exclusive territories was prohibited, they switched to alternative contractual devices to achieve this goal. The introduction of price ceilings despite free intrabrand competition also suggests that car manufacturers tried to prevent some dealers from gaming the quantity floors by selling to other dealers' customers while charging monopolistic prices at their own locations. (c) 2009 by The University of Chicago. All rights reserved.

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    File URL: http://dx.doi.org/10.1086/595765
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    Article provided by University of Chicago Press in its journal The Journal of Law and Economics.

    Volume (Year): 52 (2009)
    Issue (Month): 4 (November)
    Pages: 691-700

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    Handle: RePEc:ucp:jlawec:v:52:y:2009:i:4:p:691-700
    Contact details of provider: Web page: http://www.journals.uchicago.edu/JLE/

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    1. Klein, Benjamin, 1980. "Transaction Cost Determinants of "Unfair" Contractual Arrangements," American Economic Review, American Economic Association, vol. 70(2), pages 356-362, May.
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    4. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716.
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    7. Joseph J. Spengler, 1950. "Vertical Integration and Antitrust Policy," Journal of Political Economy, University of Chicago Press, vol. 58, pages 347-347.
    8. Ralph A. Winter, 1993. "Vertical Control and Price Versus Nonprice Competition," The Quarterly Journal of Economics, Oxford University Press, vol. 108(1), pages 61-76.
    9. Brickley, James A & Dark, Frederick H & Weisbach, Michael S, 1991. "The Economic Effects of Franchise Termination Laws," Journal of Law and Economics, University of Chicago Press, vol. 34(1), pages 101-132, April.
    10. Rey, Patrick & Tirole, Jean, 1986. "The Logic of Vertical Restraints," American Economic Review, American Economic Association, vol. 76(5), pages 921-939, December.
    11. Smith, Richard L, II, 1982. "Franchise Regulation: An Economic Analysis of State Restrictions on Automobile Distribution," Journal of Law and Economics, University of Chicago Press, vol. 25(1), pages 125-157, April.
    12. Brickley, James A, 1999. "Incentive Conflicts and Contractual Restraints: Evidence from Franchising," Journal of Law and Economics, University of Chicago Press, vol. 42(2), pages 745-774, October.
    13. Mathewson, G F & Winter, R A, 1983. "Vertical Integration by Contractual Restraints in Spatial Markets," The Journal of Business, University of Chicago Press, vol. 56(4), pages 497-517, October.
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