CORRELATED CONTRACTS IN OLIGOPOLY

I consider a market that consists of two competing franchise systems, and focus attention on franchise agreements that specify the payment o f the franchisees as a quantity contingent nonlinear price schedule. A t the equilibrium, the schedule of wholesale prices reflects both an ' 'informational'' and a ''strategic'' component, where the ''informatio nal'' component is weakened if the unit costs of competing franchisees are correlated. One of the multiple equilibria that exist with correl ation enables each franchisor to extract the complete producer surplus . Franchisors may prefer, however, other equilibria where franchisees can earn positive informational rents.