Abstract

http://ssrn.com/abstract=1532879
 


 



The Behavioral Law and Economics of Franchise Tying Contracts


Uri Benoliel


“College of Law and Business - Ramat Gan Law School

January 7, 2010

Rutgers Law Journal, Vol. 41, p. 527, 2010

Abstract:     
The traditional law-and-economics analysis suggests that the per se illegality rule that governs franchise tying contracts is inefficient. Legal economists particularly argue that a per se illegal standard fails to account for the enhancement in efficiency that a franchise tying contract provides. One central improvement in efficiency that a franchise tying contract creates, according to legal economists, is a decrease in the franchisor's monitoring costs. Particularly, by requiring a franchisee to purchase products directly from the franchisor, a tying contract reduces the costs that the franchisor will have to incur in order to monitor the quality of products sold by the franchisee to customers.

Building upon a noteworthy body of empirical research, this article will argue that the traditional law-and-economics analysis is incomplete. Although a franchise tying contract may reduce product quality-related monitoring costs, it is also likely to significantly increase other monitoring costs.

More specifically, this article will argue that a centralized franchise tying relationship is likely to continually constrain the franchisee's autonomy. Consequently, the tying relationship is likely to decrease the franchisee's satisfaction with the relationship. The emotional experience of decreased satisfaction is likely to promote aggressive retaliatory behavior, which may take the form of franchisee opportunistic behavior. Ultimately, a centralized tying relationship will increase the likelihood that the franchisee will take three central types of opportunistic actions towards the franchisor: manipulate information, shirk the contractual obligation to provide adequate customer service and shirk the contractual obligation to maintain cleanliness standards in the entire franchise unit. These potential opportunistic actions, as they accumulate, are likely to significantly increase the franchisor's information, customer-service and cleanliness-related monitoring costs, thereby off-setting the product-quality monitoring cost savings arguably generated by a franchise tying contract.

Number of Pages in PDF File: 25

Keywords: Franchise, Tying

JEL Classification: K21

Accepted Paper Series


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Date posted: January 10, 2010 ; Last revised: September 8, 2011

Suggested Citation

Benoliel, Uri, The Behavioral Law and Economics of Franchise Tying Contracts (January 7, 2010). Rutgers Law Journal, Vol. 41, p. 527, 2010. Available at SSRN: http://ssrn.com/abstract=1532879

Contact Information

Uri Benoliel (Contact Author)
“College of Law and Business - Ramat Gan Law School ( email )
26 Ben-Gurion St.
Ramat Gan, 52275
Israel
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