Formula Pricing and Profit Sharing in Inter-Firm Contracts

Roger Blair and Francine Lafontaine have a new paper out on “Formula Pricing and Profit Sharing in Inter-Firm Contracts” (here). They explore the use of profit-sharing contracts for vertical relationships, particularly the case of successive monopoly or the double-marginalization problem. Naturally, their focus is on franchise relations. The abstract follows:

Ronald Coase viewed transaction cost minimization as a central goal of contracting and organizational decisions. We discuss how a solution to the traditional successive monopoly problem that has not been discussed in the literature can economize on such costs. Specifically, we show that when we allow for profit sharing between upstream and downstream firms, a simple formula pricing contract can be used to generate the vertically integrated level of profits. This simple contract, empirically, would take the form of the standard linear wholesale price contracts that are ubiquitous in vertical contexts, even those where we might expect successive monopoly to be an issue. We discuss the advantages of the proposed contract from a transaction cost perspective. We also discuss some of its limitations, in particular the likelihood of misrepresentation of costs, and ways in which such misrepresentation might be addressed in the contract.

The Economics of Jimmy John’s “Freaky” Non-compete Clause

Jimmy John’s, the national sub-sandwich company known for being “freaky good, freaky fast,” has been in the news for being rather freaky about having employees sign non-compete clauses as part of their standard labor agreements.

Non-compete clauses are not uncommon for senior executives, technology professionals, or professionals whose business is built on client relationships, like lawyers or sales representatives. And although an article in the New York Times this summer highlights how non-compete clauses are increasingly appearing in unexpected places, one certainly wouldn’t expect such an agreement as a condition of employment at a sandwich shop–unless maybe it was to protect the time-warp technology for their freak fast delivery.

There’s just one problem with the hype in the media around this issue: most of it is ignoring some important facts that call into question just how big a deal this is, except as a media stunt for some disgruntled employees. For example: Continue reading The Economics of Jimmy John’s “Freaky” Non-compete Clause