Retail Characteristics and Ownership Structure

The choice of vertical relationships between an upstream manufacturer and a set of heterogeneous downstream retailers/entrepreneurs is examined using a principal-agent framework. Standard principal-agent theory predicts that as unobservable effort exerted by the retailer/entrepreneur becomes more important to the manufacturer, contracts between the manufacturer and agent will entail strong incentives and less direct control. The observability of effort is linked to retail characteristics in the gasoline industry, and station-level data on retail characteristics and ownership structure from every gasoline station in the Los Angeles retail gasoline market from 1992–1996 confirm the model's predictions.