Vertical Foreclosure Using Exclusivity Clauses: Evidence from
Shopping Malls∗
Itai Ater
Tel Aviv University
March 9, 2014
Abstract
Exclusive contracts are one of the most controversial topics in the economic analysis of
antitrust. Yet, very few empirical papers analyze the determinants and the consequences of
exclusive contracts. In this paper, I study exclusive contracts between hamburger restaurants and Israeli shopping malls, in which mall owners commit to prohibiting additional
hamburger restaurants from entering their malls. I investigate the determinants of these
exclusive contracts and examine how such contracts affect the number of hamburger restaurants and their sales. I show that exclusive contracts are less likely to be adopted in larger
malls, in malls that face more competition from other malls, and in malls that opened
before 1993, when McDonald’s and Burger King entered the Israeli market. I then use
the mall’s opening year - before or after 1993 - as an instrumental variable to estimate a
negative effect of exclusive contracts on the number of restaurants and on total mall hamburger sales. My findings are generally consistent with anti-competitive vertical foreclosure
models.
∗
This paper is a revised chapter of my PhD dissertation. I am thankful to the co-editor and two anonymous
reviewers for very helpful suggestions. I also received helpful comments from Ran Abramitzky, Assaf Eilat, Liran
Einav, David Genesove, Nadav Levy, Massimo Motta, Peter Reiss, Oren Rigbi, Ilya Segal, Yossi Spiegel and
Yaron Yehezkel. Nadav Anin provided excellent research assistance. I thank the Falk Institute for Economic
Research in Israel for financial support. Any remaining errors are my own.
1
JEL classification: K21; L42
Keywords: vertical restraints; exclusive dealing; shopping malls; antitrust; foreclosure
1
Introduction
The justifications for and consequences of exclusivity arrangements, whereby one firm limits
its freedom to deal with other firms, are among the most contentious issues in the economic
analysis of antitrust. Theoretical models have shown that such arrangements can be efficiencyenhancing or can be an anticompetitive means to foreclose rivals. Given the controversial
nature of exclusivity arrangements, it is not surprising that these arrangements are featured
in many prominent antitrust cases. Microsoft, for example, was accused of requiring computer
manufacturers to exclude Netscape’s web browser in favor of Microsoft’s Internet Explorer
browser. More recently, Intel was accused of using exclusive dealing to reduce competition
with its main rival AMD, and various allegations have been raised concerning the impact of
the exclusive distribution of Apple’s iPhone by AT&T. Closely related to this study are the new
guidelines published by the UK Office of Fair Trade regarding the application of competition
law in the context of land agreements as well as recent decisions by the Australian and the
South African competition authorities.1
Due to the limited availability of micro-level data on exclusive contracts, very few empirical papers study the sources and the consequences of these arrangements. Whinston (2006)
writes: “Empirical evidence on the motives and effects of exclusive contracting is remarkably
limited... formal statistical studies of market data are rare.” This paper aims to start filling
this gap by investigating the determinants and the effects of exclusivity clauses made between
owners of Israeli shopping malls and hamburger chain restaurants located in those malls. In
particular, the contracts I study prohibit the owner of the shopping mall from leasing space to
1
See
http://www.oft.gov.uk/OFTwork/policy/land-agreements,
http://www.accc.gov.au/
media-release/supermarket-agreement-opens-way-for-more-competition,
http://www.compcom.co.
za/assets/Uploads/AttachedFiles/MyDocuments/Competition-News-Edition-41-Dec-2011.pdf.
For a
discussion on how the Federal Trade Commission handled exclusive dealing clauses in malls, see Clarkson and
Muris (1981) and also Judge Posner’s opinion in Walgreens Co. V. Sara Creek Property Co., 966 F.2d 273, 274
(7th Circuit 1992).
2
other hamburger restaurants. My analysis draws from theoretical papers on vertical foreclosure, defined as: “A dominant firm’s denial of proper access to an essential good it produces,
with the intent of extending monopoly power from that segment of the market (the bottleneck segment) to an adjacent segment (the potentially competitive segment)” (Rey and Tirole
(2007)). To motivate the empirical analysis, in Section 2 I develop testable hypotheses which
I later test in the data.
The first set of hypotheses focuses on the private incentives to adopt exclusive contracts.
The first hypothesis is based on the idea that when competition between restaurants in a mall
is stronger – that is, when two restaurants are more likely to cannibalize each other’s sales
– the mall and restaurants in the mall have greater incentives to adopt exclusivity clauses
(Whinston (2006)). Correspondingly, I hypothesize that exclusivity clauses are more likely to
be adopted in small malls, where the competition between restaurants is stronger than in larger
malls. The second hypothesis is that exclusivity arrangements are less likely to be adopted
in malls that face stronger competition from other malls. The intuition is that restaurants
will have lower incentives to foreclose their rivals from a given mall when these rivals can find
alternative distribution channels, i.e., through nearby malls (Krattenmaker and Salop (1986)).
I find support for both hypotheses in the data.
A second set of hypotheses concerns the effects of exclusivity clauses both on the
number of hamburger restaurants and on the sales of hamburger restaurants in a given mall.
According to foreclosure models (e.g., Hart and Tirole (1990)) exclusive contracts limit the
number of firms (i.e., hamburger restaurants) in the market (i.e., shopping mall) and, as a
result, negatively affect competition and total sales in the market. The effect on total sales
is important because it is sometimes used to assess the social costs of exclusive contracts
(Lafontaine and Slade (2008)). To illustrate the relationship between exclusive contracts,
the number of mall hamburger restaurants and total mall hamburger sales, Figure 1 presents
the annual total sales of hamburger restaurants in Israeli malls in 2002 as a function of the
number of stores in the malls in which they are located. The figure shows that malls with
more stores have higher total hamburger sales and are less likely to adopt exclusive contracts.
3
More importantly, it shows that, conditional on the number of stores in each mall, malls
that sign exclusivity agreements with hamburger chains contain, on average, fewer hamburger
restaurants, and that the total hamburger sales in these malls are lower, as compared with
malls without such agreements. This suggests that exclusivity contracts negatively affect total
mall hamburger sales through their impact on the number of hamburger restaurants in the
mall. This empirical relationship, however, cannot be interpreted as causal; for example, it
may simply reflect a tendency for malls with low hamburger demand to adopt exclusivity
contracts.
To estimate the impact of exclusive dealing clauses on sales, it is necessary to identify
an exogenous source of variation in the decision to incorporate an exclusivity clause into the
lease agreement. Such a determinant of exclusivity clause should affect the decision to include
an exclusivity clause in the lease agreement while not having a direct effect on the sales of
hamburger restaurants. I take advantage of the unexpected entry of McDonald’s and BurgerKing into the Israeli market, turning the local hamburger chain market into an oligopoly.
Before 1993, the incumbent hamburger chain in Israel, BurgeRanch, was virtually the only
national chain, and the lease agreements in malls where it operated did not include exclusivity
clauses. In late 1993 and early 1994, respectively, McDonald’s and Burger King entered the
Israeli market. Following their entry, hamburger chains began competing to secure attractive
locations for their restaurants and incorporating exclusivity clauses into their lease agreements.
Thus, I exploit the variation in shopping mall opening dates, before versus after 1993, to
investigate the effect of exclusivity clauses on the number of hamburger restaurants in a given
mall and consequently on hamburger restaurants’ sales. My estimates suggest that exclusivity
clauses have a sizable negative effect on the number of hamburger restaurants and thus also
negatively affect total mall hamburger sales.
The restriction implied by the instrumental variable estimation is that, conditional on
the controls included in the regression, the mall opening date has no effect on the number of
hamburger restaurants or on the sales by hamburger restaurants in 2002, aside from its effect
on the decision to adopt exclusivity clauses. This restriction is threatened if the year the mall
4
was opened is correlated with the demand for hamburgers in the mall. Such correlation might
occur, for instance, if malls that opened before 1993 were able to secure better locations and
hence in 2002 were still able attract more customers compared with malls that opened after
1993. In section 4.3 I describe several strategies that mitigate this concern. For instance, I
check that the age of the mall has no predictive power with regard to the sales of hamburger
restaurants in the mall. In addition, using sales data from apparel stores located in the same
malls, I show that malls that opened before the entry of the international hamburger chains
in 1993 do not have higher sales than malls that opened after 1993.
There is very little empirical evidence on exclusive agreements in general or on vertical
foreclosure in particular. Rey and Tirole (2007) write: “We are aware of few empirical studies
of modern foreclosure theory. Needless to say, this is an area that would deserve further investigation.” The studies that do provide some support for foreclosure theory investigate instances
of full integration between upstream and downstream firms. Chipty (2001) investigates vertical
integration decisions in the cable industry; she shows that integrated cable operators exclude
rival channels but also charge lower prices. Suzuki (2009) performs an event-study analysis
of the merger between Time Warner and Turner Broadcasting and finds some evidence of
foreclosure. Martin, Normann and Snyder (2001) test the theory on vertical foreclosure using
experimental techniques and find partial support for it. The empirical studies that investigate
the role of exclusive dealing rather than full integration focus primarily on the beer industry
and do not find evidence consistent with foreclosure theory.2 Asker (2005) analyzes the effect
of exclusive distribution arrangements on the Chicago beer market and does not find evidence
of foreclosure. Sass (2005) uses a detailed survey of the cost structure of 391 beer distributors
to show that exclusive dealing increases the productivity of the sales and promotional efforts
of distributors. More generally, two surveys of the empirical literature on vertical restraints
(Lafontaine and Slade (2008) and Cooper, Froeb, O’Brien and Vita (2005)) conclude that the
overall empirical evidence indicates that vertical restraints have positive welfare effects, and
2
See, however, also recent studies by Nurski and Verboven (2013) and Bar-Isaac and Gavvazza (2013) who
study the role of exclusive contracts in the European car market and in Manhattan real-estate market, respectively. It is also worth noting that previous empirical studies have generally not focused on settings in which a
dominant firm denies access to an essential good it produces.
5
that there is no one paper that unambiguously shows that the use of vertical restraints leads
to lower total output and reduced welfare. Finally, this study is also related to the literature
on two-sided markets, of which shopping malls are a prime example. To my knowledge, this
literature has not considered exclusive arrangements in which the platform itself commits to
not allowing other firms to join the platform.3
The remainder of the paper is organized as follows. In Section 2 I develop the testable
hypotheses as drawn from the theoretical literature. In Section 3 I describe the Israeli shopping
mall and hamburger chain markets and the data used in the empirical analysis. In Section
4 I present the estimation results for the determinants and effects of exclusivity. Section 5
discusses the results, and Section 6 concludes.
2
Theoretical background and testable hypotheses
Exclusive agreements between retailers and shopping malls imply that mall owners are prohibited from leasing space in their malls to competing retailers. Such agreements raise antitrust
concerns, since they may foreclose entry and limit competition in a given mall. Yet, it is often
argued that exclusive agreements can help firms organize their distribution more efficiently or
encourage investments (see Telser (1960) and Marvel (1982) for early works that emphasize
efficiency rationales for exclusive contracts). In such cases, where these agreements result in
cost reduction or some other efficiency dividend, antitrust concerns may be unfounded.
A common theme in theoretical foreclosure models is the idea that adversely affected
parties are absent at the contracting stage. Whinston (2006) points out that these foreclosure
models can be broadly divided into two main classes. The first class of models, which is more
relevant to this study, considers competition among firms to sign exclusive contracts while other
parties such as future customers do not participate in the contracting stage (Bernheim and
Whinston (1998), hereafter ‘BW’). Whinston (2006) also makes the point that under certain
conditions the BW framework can incorporate vertical foreclosure models (Hart and Tirole
3
Another related strand of literature concerns the debate over the growth (encroachment) strategies adopted
by U.S. franchisors (see Kalnins (2004)).
6
(1990)). The second class of models (e.g., Aghion and Bolton (1987), Rasmusen, Ramseyer
and Wiley (1991)) considers situations in which the buyer and the seller bargain over exclusivity
while a rival buyer/seller is absent. In these models an incumbent firm enjoys a first-mover
advantage which leads to the adoption of exclusive contracts that prevent the entry of rival
firms.
The BW framework implies that exclusive contracts maximize the joint surplus of
the contracting parties, potentially at the expense of parties who are not involved in the
contracting process – in this case, mall customers. In particular, under this framework an
exclusive contract between a mall owner and a retailer will be adopted only if it effectively
limits the competition between downstream retailers, enabling the mall owner to extract higher
rents from the restaurant that operates under an exclusivity contract. In other words, if the
exclusive contract does not affect competition in the downstream market, then retailers have
no reason to pay for it. Whinston (2006) emphasizes this point by showing that exclusivity
contracts will be adopted when downstream retailers are undifferentiated (assuming multiple
retailers are in the market), whereas they are less likely to be adopted when retailers are
differentiated.4
I follow Whinston (2006) and assume that the size of the mall provides a measure
for the level of differentiation across hamburger restaurants in the mall. The differentiation
stemming from the size of the mall is supplementary to the inherent differentiation that exists
among hamburger chains. Differentiation in larger malls can be driven either by the ability to
locate hamburger restaurants at distant locations from one another, or by the heterogeneity
in the tastes of the population that a larger mall serves, some preferring one hamburger chain
over the other. Indeed, in my data large malls often have more than one food-court and locate
hamburger restaurants in different areas in the mall. Furthermore, in most Israeli malls in
which multiple hamburger chains operate, some restaurants offer kosher food and some offer
4
The theoretical literature (Marx and Shaffer (2007) and Miklos-Thal, Rey and Verge (2011)) has also shown
that upstream firms are likely to establish exclusive contracts when they cannot sign rich enough contracts that
would sustain or replicate the vertically integrated outcome, i.e., combine the benefits of differentiation with
those of avoiding rent dissipation caused by downstream competition. This requirement seems to fit the simple
revenue-sharing type of contract that is common in the shopping mall industry.
7
non-kosher food.5 Thus, drawing from the theoretical literature (Whinston (2006)), exclusive
contracts between malls and hamburger restaurants are less cost-effective in larger malls and
therefore are less likely to be adopted in these malls.6 Thus, the first testable hypothesis that
I examine is:
Hypothesis 1 Consistent with foreclosure models, exclusivity clauses between malls
and hamburger restaurants are less likely to be adopted in larger
malls.
The theoretical literature on market foreclosure has also emphasized that exclusive arrangements may be used to raise rival firms’ costs (e.g. Krattenmaker and Salop (1986)). According
to this argument, retail chains (e.g., McDonald’s) invest in exclusive relationships with malls in
order to raise the costs that competing chains (e.g., Burger King) incur in order to gain access
to customers. Following this reasoning, I hypothesize that chains will find it less profitable to
invest in such exclusionary practices when alternative distribution channels, such as nearby
malls, are available.7 Thus, I empirically test the following:8
Hypothesis 2 Consistent with foreclosure models, exclusivity clauses are less likely
to be adopted in malls that face stronger competition from nearby
malls.
The literature on vertical foreclosure has emphasized the role of commitment by an upstream
monopoly as a means to foreclose rivals from the downstream market (Hart and Tirole (1990)).
The central idea in the commitment literature is that downstream firms are concerned that
5
The same restaurant cannot offer both kosher and non-kosher food. Furthermore, kosher restaurants typically sell to a large base of customers but are closed on weekends.
6
A formal theoretical model developed in appendix A further shows that exclusive contracts are less likely
to be adopted in larger malls.
7
A similar prediction can be derived by focusing on the incentives of malls to grant exclusivity. A mall’s
success depends on the mix of mall stores, which, in turn, affects the number of customers patronizing the mall
and the payments the mall owner receives from the retailers at the mall. When contemplating whether to sign
an exclusive contract with a particular hamburger chain, mall owners evaluate the additional payment they can
receive from that chain in return for exclusivity, and balance it against the costs of disrupting the optimal mix of
mall stores by choosing to have only one hamburger chain in the mall. As the number of competing malls rises,
the costs associated with choosing a non-optimal mix of mall stores increase, making the exclusive contract less
appealing for the mall.
8
A different prediction could potentially be derived from efficiency-enhancing models of exclusive contracts.
These models often stress that exclusive contracts are used to strengthen inter-brand competition (i.e., competition between malls) and therefore exclusive arrangements are arguably more likely to be adopted by malls
that face strong competition from nearby malls.
8
the upstream monopoly will jeopardize their dominant position in the downstream market
by supplying inputs to other downstream rivals. Consequently, a downstream firm will be
unwilling to pay high payments to an upstream firm unless the latter commits – through
exclusive contracts – not to sell to rival firms.
To test the commitment argument, an exogenous change in the threat of entry by
hamburger chains into malls is needed. I exploit the unexpected entry of McDonald’s (October
1993) and Burger King (January 1994) into the Israeli market as an exogenous variation in
the threat of entry faced by BurgeRanch, which until 1993 was the only national hamburger
chain in Israel.9 Accordingly, following Hart and Tirole (1990) I test the following:10
Hypothesis 3 Consistent with foreclosure models, exclusivity clauses are more likely
to be adopted by malls that opened after 1993 than by malls that
opened before 1993, when the Israeli hamburger retail market was
dominated by one chain.
Exclusive contracts between malls and hamburger chains prohibit the opening of restaurants
operated by other chains. Under certain conditions, a chain that signs an exclusive contract
with a given mall may choose to operate multiple restaurants in that mall, making the total
number of hamburger restaurants in the mall the same as it would have been without an
exclusive contract. However, the likelihood of an incumbent chain opening an additional
restaurant in a given mall is probably lower than the likelihood of a rival chain entering a
mall (that does not operate under an exclusivity clause). This is because each additional
restaurant cannibalizes the sales of existing restaurants; while the incumbent chain considers
the business-stealing effect when it contemplates opening a new restaurant, rival chains (that
do not currently operate in the mall) do not. Thus, based on this reasoning, I predict that:
9
In section 3.1 I provide more details on this change in market structure. There are two main reasons why
renegotiation by BurgeRanch and malls opened before 1993 rarely took place after McDonald’s and Burger King
announced their entry. First, adopting an exclusivity clause is often used to attract anchor tenants, such as
hamburger chains, in the early stages of a mall development project. Once the entry cost was considered sunk,
it was much harder for the chain to bargain. In addition, the length of the lease contracts, typically 5 years,
introduced some rigidity in changing the terms of the lease.
10
In contrast to foreclosure models, models that emphasize the efficiency gains from operating through an
exclusive retailer could suggest that because the exclusive relationship is beneficial for both the mall and the
exclusive retailer, shopping malls will continue to operate with only one retailer also after 1993.
9
Hypothesis 4 Fewer hamburger restaurants operate in malls that adopt exclusive
contracts.
The next two hypotheses concern the impact of exclusivity contracts on hamburger sales at
the mall and at the restaurant levels. Focusing on the effect of exclusivity contracts on sales
at the market (mall) level is important because previous studies have considered this effect
to be a reflection of the effect of exclusivity contracts on consumer surplus (see the survey by
Lafontaine and Slade (2008)). Generally, foreclosure theories imply that the total quantity sold
should be lower in the presence of exclusive contracts because a retailer that operates under
exclusivity faces no competition and hence can charge a higher price or offer lower service
quality (e.g., shorter opening hours, slower service or lower hygienic quality) than when it
faces competition (e.g., Hart and Tirole (1990), Bernheim and Whinston (1998)).11 When
downstream retailers offer differentiated goods total sales are further expected to be lower
because the adoption of exclusive contracts limits the variety that customers are offered (e.g.,
Kuhn and Vives (1999)).12 In the current study, the effects of exclusive contracts on quantity
sold will be a result of product differentiation or lower quality rather than a result of price
differences. This is because items at Israeli hamburger restaurant chains are priced similarly
across all the chain restaurants regardless of whether these restaurants operate under exclusive
contracts. Accordingly, I empirically examine the following:
Hypothesis 5 Consistent with foreclosure models, exclusive contracts negatively affects total mall hamburger sales.
It is also useful to consider the effect of exclusive contracts on the sales of an individual
restaurant. According to models that emphasize efficiency rationales for exclusive contracts,
restaurants that operate under exclusive contracts will sell more than restaurants that do not
operate under exclusive contracts for two reasons. First, according to these models, restaurants
11
The commitment to limit competition in the downstream market enables the upstream firm (i.e., the mall) to
extract higher payments from the retailer that operates under exclusivity. As further explained in the theoretical
model in appendix A, mall owners will agree to sign an exclusivity clause with a hamburger chain if the payment
they receive for the exclusivity clause plus the rent from the retailer who uses the ”freed” space in the mall are
higher than the additional rents the mall owners would have received from a second hamburger restaurant.
12
In contrast to foreclosure models, efficiency-based models are ambiguous regarding the effect of exclusive
contracts on total sales. This ambiguity occurs because the efficiency gained by restaurants that operate under
exclusive contracts might lead to higher total sales and thus compensate for higher prices or for the reduced
variety offered to mall customers.
10
that operate under exclusive contracts have some efficiency advantage over restaurants that
do not have exclusive clauses built into their contracts. This advantage (e.g., higher returns to
advertising) may translate into higher sales by individual restaurants. Second, restaurants that
operate under exclusive contracts have a dominant position in the mall, which is also likely to
increase their sales in comparison to restaurants that do not operate under exclusive contracts,
especially when prices are similar across restaurants regardless of whether they operate under
exclusive contracts.13 Based on the above arguments, I test the following:
Hypothesis 6 Consistent with efficiency-based models of exclusive contracts, there
exists a positive relationship between exclusive contracts and sales at
the restaurant level.
3
Industry background, data and descriptive statistics
3.1
Industry background
In 2002, 75 malls were operating in Israel and 68 of these malls contained at least one hamburger
restaurant.14 Mall ownership in Israel was distributed across several companies in 2002. The
largest of these companies had stakes in seven malls, with most other companies owning only
one mall each. The typical rent structure for tenants in a shopping mall was either a fixed base
rent or a fixed share of the monthly revenue, whichever was higher. In successful shopping
malls, the latter revenue share was usually below 10%. Lease contracts typically covered
a period of 5-10 years; furthermore, tenants typically had an option to renew their leases,
sometimes for up to 22 years, if they met certain conditions. For many Israeli retail industries,
shopping malls are considered a prime location.
Three national hamburger chains were operating in 2002 in Israel: McDonald’s with
108 restaurants (44% of restaurants) and a market revenue share of 51%; BurgeRanch with 83
13
In contrast to efficiency-based models for exclusive contracts, foreclosure models are unclear with respect to
the effect of exclusive contracts on sales by individual restaurants. On the one hand, restaurants that operate
under exclusive contracts do not face rivalry in the mall and hence will sell more. On the other hand, even
if prices are unchanged under exclusive contracts, these restaurants may reduce their service quality. Thus,
overall, the adoption of exclusivity clauses will not necessarily lead to higher sales by individual restaurants.
14
The market description is based on the Antitrust Authority’s decision in 2002 to block the merger between Burger King and BurgeRanch, in addition to information on the chains’ web sites, media coverage, and
information gathered from conversations with chain and shopping mall directors.
11
restaurants (33% of restaurants) and a 28% market revenue share; and Burger King, with 56
restaurants (23% of restaurants) and a 21% market revenue share. McDonald’s was considered
the dominant firm in 2002, and its average sales per restaurant were higher than those of the
other chains. McDonald’s was generally more popular than the other chains among average
consumers and among children. Burger King and BurgeRanch fared somewhat better among
young males and more kosher-oriented customers, respectively. Each chain invested nationally
in advertising and product development.
McDonald’s and Burger King entered the Israeli market in 1993 and in 1994, respectively, following developments in the peace process and the relaxation of the Arab boycott of
Israel in the early 1990s (Fershtman and Gandal (1998)). Prior to their entry, BurgeRanch,
which had 44 restaurants in 1994, was the only national hamburger chain to open restaurants
in Israeli malls. Since 1994, the number of chain-affiliated restaurants has increased rapidly. A
main driver for this rise was the wave of new shopping malls that were opened in Israel since
1986 (when the first shopping mall in its typical form was established). In recent years Burger
King and BurgeRanch have faced considerable difficulties and entered bankruptcy procedures
in 2003 and 2008, respectively.
Lease agreements among hamburger chains and malls were negotiated on a case-by-case
basis between the malls and the local headquarters of the chains. All hamburger restaurants
that were located in the malls were operated by the respective chain and following the standards
of the chain. In particular, prices for each chain were set by the chain’s headquarters and were
identical across all of the chain’s restaurants. In addition, prices across the different chains
were roughly similar for the main products. For example, the standard meals in McDonald’s
and BurgeRanch were priced similarly in 2002.
3.2
Data
The following information was available for the 68 malls that contained at least one hamburger
restaurant in 2002: mall size (in m2 ), total number of stores in the mall, ownership of the mall,
mall type (enclosed or unenclosed mall), mall opening date, and whether exclusivity clauses
12
were included in the lease agreement between the hamburger chain and the mall.15
I also obtained restaurant-level sales data for all Burger King and BurgeRanch restaurants.16 Out of the 68 malls in my data, 44 contained at least one restaurant operated by
one of these chains. For the remaining 24 malls - in which McDonald’s operated as the only
hamburger chain - no hamburger sales data were available. The data for the latter malls were
used to study the decision to adopt exclusivity and to determine the competitive environment
of malls. For each of the 44 malls for which some sales data were available, I used the sales data
to construct a measure of the total hamburger sales in the mall. If sales data were available
for all hamburger restaurants operating in a particular mall, I was able to calculate the actual
aggregate hamburger sales in the mall. In 11 out of the 44 malls, a McDonald’s restaurant was
operating together with either Burger King or BurgeRanch; in each of these cases, I assumed
that the McDonald’s restaurant sales were the average of the sales of the other hamburger
restaurants in the mall. A measure of total mall hamburger sales could then be derived.17
3.3
Descriptive statistics
Table 1 lists descriptive statistics for annual sales and rent of Burger King restaurants in
addition to information on the annual sales of BurgeRanch restaurants. The figures are in
thousand Israeli shekels (1 dollar ≈ 4 shekels). As can be seen in the table, the average
sales at hamburger restaurants located in malls are significantly higher than the corresponding
sales at non-mall locations. Table 2 provides descriptive statistics for mall characteristics,
distinguishing between malls in which each hamburger chain operates under exclusive contract
and malls in which no exclusive contract is adopted. In roughly 80% of the malls, a hamburger
15
Data on hamburger restaurant locations came from the chains’ web sites and their headquarters. Additional
data on the existence of exclusivity clauses, mall opening dates, and the identities of mall landlords were obtained
from chains’ websites, the Israeli Antitrust Authority, shopping mall directors, and media coverage over the years.
16
These data were obtained from BurgeRanch and from a potential acquirer of the Burger King franchise in
Israel after its bankruptcy in 2003.
17
The derived total sales measure for these malls is likely to be a low estimate of the actual mall total
hamburger sales because (based on the aggregate chain data mentioned above) McDonald’s restaurants typically
generate higher sales compared with restaurants of the other chains. Using higher estimates of McDonald’s
restaurant sales (or actual measures of McDonald’s sales, had they been available) would only strengthen my
results concerning the distinction between malls with and without exclusivity. In a separate analysis described
in section 4.3, I verify that my results are robust to changes in the assumption regarding the sales of McDonald’s
restaurants relative to the sales of the other chains.
13
chain operates under exclusivity. Consistent with hypotheses 1 and 2, malls that do not
adopt exclusive contracts with hamburger chains are considerably larger (as measured by
both their size and the number of stores) and are typically located closer to other malls.
Furthermore, consistent with hypothesis 4, more restaurants operate in malls that did not
establish exclusive contracts with hamburger restaurants. This latter finding arises despite
the fact that in some cases, a chain that adopted an exclusivity clause with the mall owner
operates multiple restaurants in that mall. Finally, exclusive contracts are more common
among malls that opened after 1993, when the Israeli hamburger chain market became an
oligopoly. In particular, the lease agreements of hamburger restaurants in 7 of the 15 malls
that had opened before 1993 included exclusivity clauses. In contrast, the lease agreements
of hamburger restaurants in 46 of the 53 malls that opened after 1993 included an exclusivity
clause.
Panel A in Table 3 presents further evidence on the negative relationship between the
existence of exclusive contracts in the lease agreements and mall size. Malls are divided into 3
categories: small malls, defined as having commercial space of less than 9,000 m2 ; intermediate
size malls, defined as being larger than 9,000 m2 and smaller than 18,000 m2 ; and large malls,
with a total commercial area of more than 18,000 m2 . For each category, the number of malls
that adopt exclusivity clauses with hamburger chains and the number of hamburger restaurants
in each (1, 2, or 3) is listed. As the table shows, 96% of small malls adopted exclusivity clauses
with hamburger chains, while only 50% of the large malls adopted exclusive contracts with
hamburger chains. Panel B of Table 3 presents the likelihood that an exclusivity clause was
adopted in a mall alongside the level of competition a mall faces from other malls. I measure
mall competition according to the number of malls within a radius of 5 kilometers,18 and
define three levels of competition: weak competition, if there is no more than one other mall
located within 5 kilometers; medium competition, if there are 2 or 3 competing malls within 5
kilometers; and strong competition, if there are more than 3 competing malls located within
5 kilometers. The descriptive statistics reveal a negative relationship between the number of
18
The 5-kilometer cutoff is based on the proposed guidelines published by the Israeli Antitrust Authority in
its investigation of the effects of exclusivity clauses adopted by shopping malls.
14
malls located near a particular mall and the likelihood that this mall adopted an exclusivity
clause with a hamburger chain.
4
Estimation and Results
In this section, I test the hypotheses developed in Section 2. I first look at the determinants
of exclusivity clauses (hypotheses 1-3) and subsequently examine their effects on the number
of restaurants and on sales at the mall and at the restaurant level (hypotheses 4-6).
4.1
Estimation of the determinants of exclusive contracts
To explore the determinants of exclusivity clauses, I estimated alternative versions of the
following equation:
EXCi = η + θ1 ∗ D1993,i + θ2 ∗ M all Compi + θ3 ∗ M all Sizei + τ1 ∗ N umber of Storesi + φ1 ∗ Xi + i
(1)
where EXCi , the dependent variable, is a dummy variable indicating whether a hamburger
restaurant operates under an exclusivity clause in a given mall. Table 4 presents the results
using alternative linear probability model specifications, with the entire sample of malls and
malls with sales data analyzed separately and presented in the odd and even numbered columns,
respectively. D1993 is an indicator variable for the mall’s opening year, taking the value of one if
the mall opened before 1993 and zero otherwise. The coefficient on this variable is negative and
statistically significant in all specifications. In columns 3 and 4 I use the M all Comp variable,
which corresponds to the number of malls located within a 5-kilometer radius, and find that
it also has a negative association with the use of exclusive contracts in a mall. Similarly, as
shown in columns 5 and 6, I find a negative relationship between mall size and the adoption
of exclusivity clause. In columns 7 and 8, I use these three variables to explain the decision
to adopt exclusivity by the mall and the hamburger restaurant. The three variables are all
negative and statistically significant (at p-value < 0.06) for the sample for which sales data
15
were available. In columns 9 and 10, similar qualitative results are derived when I add the
following control variables: the total number of stores in the mall (number of stores); the
income per capita of the residents in which the mall is located (per capita income); a dummy
variable indicating whether the mall is a power center (i.e., an unenclosed shopping mall)
and the number of hamburger restaurants located outside the mall and within a radius of 2
km (number of hamburger restaurants (2km)). The significance level of the mall competition
variable falls to 0.12 in the sample for which sales data are available. The statistical significance
further falls when the sample also includes malls in which McDonald’s is the exclusive chain in
the mall. One interpretation of this result is that malls may be willing to grant exclusivity to
McDonald’s, the market leader, regardless of the level of competition they face from other malls
because the negative effect of having only a McDonald’s restaurant in the mall is not large.
In contrast, malls are less likely to sign exclusive contracts with less dominant chains (Burger
King or BurgeRanch) when the competition the mall faces from nearby malls is strong. Below,
I turn to estimate the effects of exclusive contracts on the number of hamburger restaurants
and on the hamburger restaurants’ sales.
4.2
Estimation of the effects of exclusive contracts
Exclusive contracts between malls and hamburger chains might affect the number of hamburger
restaurants in a mall, which, in turn, affects hamburger sales. However, estimating the causal
relationship between exclusive contracts and the number of hamburger restaurants and between exclusive contracts and hamburger sales is challenging because the decision to establish
exclusive contracts is likely to be correlated with unobserved demand conditions at the mall
level. Without properly controlling for these unobserved factors, the estimated coefficients are
potentially biased. This problem could be solved if we had an instrument for the decision to
adopt an exclusive contract. Such an instrument must be important in explaining the decision to adopt exclusive contracts and hence the number of hamburger restaurants, but should
have no direct effect on the number of restaurants and on sales by hamburger restaurants. I
use the mall opening year, before versus after 1993, as an exogenous source of variation in
16
the tendency of malls and hamburger restaurants to adopt exclusive contracts. As explained
above, following the entry of McDonald’s and Burger King to Israel in late 1993 and early 1994,
BurgeRanch, the incumbent chain was no longer the only chain that could open hamburger
restaurants in Israeli shopping malls. The use of a mall’s opening year, before or after 1993, as
an instrumental variable is valid if it has no direct effect on the mall’s total hamburger sales,
other than through its effect on the likelihood of incorporating an exclusivity clause in the
lease agreement and therefore on the number of hamburger restaurants. After presenting the
estimation results, I further discuss the validity of the instrument.
4.2.1
Number of hamburger restaurants
I examine the relationship between exclusivity clauses and the number of hamburger restaurants in the mall by estimating the following 2sls regression:
N umber of Resti = α1 + β1 ∗ EXCi + γ1 ∗ N umber of Storesi + δ1 ∗ Xi + i
(2)
where N umber of Resti is the number of hamburger restaurants in mall i and EXCi indicates
whether an exclusivity clause between the mall and a hamburger chain is adopted in mall
i. N umber of Storesi is the total number of mall stores, which serves as a proxy for the
potential demand for hamburgers in the mall. In addition, Xi is a vector of the following
covariates: per capita income, type of mall, mall size and the local competition variables; 1,i
is a random error term. In this analysis, I use the mall opening date, before or after 1993, as
an instrument for the adoption of an exclusive contract by the hamburger restaurant located
in that mall. The regression results, reported in Table 5, support hypothesis 4 and indicate
that the adoption of exclusivity contracts has a strong negative association with the number
of hamburger restaurants in a mall.
17
4.2.2
Total sales by hamburger restaurants
To explore the relationship between the adoption of exclusive contracts by hamburger chains
located in malls and total mall-wide hamburger sales, I estimate the following:
M all Hamburger Salesi = α1 + β1 ∗ EXCi + γ1 ∗ N umber of Storesi + δ1 ∗ Xi + i
(3)
where M all Hamburger Salesi represents the total annual sales of hamburger restaurants in
a given mall, and EXCi indicates whether the mall and the hamburger restaurant adopted
an exclusivity clause. The results are shown in Table 6. In column 1, the exclusivity clause is
instrumented by the mall opening date, and measure its effect on mall total hamburger sales.
In columns 2, instead of directly using the exclusive clause indicator, I use the fitted value of
the number of hamburger restaurants obtained from equation 2 above. The estimates support
hypothesis 5 and suggest that the adoption of exclusivity clauses has a negative effect on total
hamburger sales through its effect on the number of hamburger restaurants in the mall.
4.2.3
Average sales by hamburger restaurants
I now turn to examine the effect of exclusivity clauses on the average sales by a hamburger
restaurant in a mall. I estimate the following specification:
Sales per Resti = α1 + β1 ∗ EXCi + γ1 ∗ N umber of Storesi + δ1 ∗ Xi + i
(4)
where the dependent variable is the total hamburger sales in a given mall divided by the
number of hamburger restaurants in that mall. As before, to control for the endogeneity of the
exclusive contract I use the mall opening date as an instrument. The results are presented in
column 3 in Table 6. The coefficients for the exclusive clause, total number of stores and per
capita income variables are positive. However, the coefficient for the exclusive clause is not
statistically significant. Thus, based on these results we cannot support or refute efficiencybased models of exclusive contracts (hypothesis 6).
18
4.3
Robustness and the validity of the instrument
The validity of the findings presented above depends on whether the mall opening date is a
valid instrument – that is, whether the mall opening date affects hamburger sales at the malls
only through its effect on the tendency to adopt exclusive contracts and hence on the number
of hamburger restaurants. The opening date instrument may not be a valid instrument if
malls that opened before 1993 were able to secure better locations, thereby attracting more
shoppers compared with malls that opened after 1993. If this is the case, then the larger
number of hamburger restaurants and higher total mall hamburger sales in these “older” malls
may be erroneously attributed to the lack of an exclusivity contract rather than to the better
locations of these malls. In other words, the concern is that the sales of hamburger restaurants
in 2002 are directly affected by the ”ages” of the respective malls rather than by the adoption
of exclusivity contracts. Three types of evidence indicate that this is not likely to be the case.
First, in Appendix B I use data on mall apparel sales to examine whether malls that opened
before 1993 had higher sales compared with malls that opened after 1993. If older malls are
indeed better located, then one would expect apparel sales in these malls to be higher than
those in newer malls. The empirical evidence from this analysis implies that apparel sales in
malls that opened before 1993 are, if anything, lower than apparel sales in newer malls. Second,
I also use the age of a mall, defined as (2002 - the year the mall opened), to test whether age
has a direct effect on hamburger sales. If older malls have an early-mover advantage in securing
better locations then these malls should have higher total hamburger sales, and this should
be reflected in the regression analysis. Yet, various specifications illustrate that the age of the
mall has a statistically insignificant relationship with total hamburger sales. Third, various
industry measures rank the profitability of Israeli malls, typically according to average sales
and rent payments in each mall. These annual rankings indicate that older malls are generally
less attractive than newer malls.
To further test the robustness of my results, I also experimented with additional specifications. For instance, I obtain similar results when I use probit regressions to investigate the
determinants of exclusivity. In addition, in the sales regressions I obtain similar qualitative
19
results if I instrument for the number of hamburger restaurants using the mall opening date.
Furthermore, the results are qualitatively similar when I estimate a system of equations (3sls)
in which exclusive clauses, the number of restaurants and total hamburger sales are used as
interrelated dependent variables. The results also do not hinge on including particular large or
small malls, or on changes in the way competition from other hamburger restaurants is defined.
Controlling for the ownership of multiple malls also does not affect the results. In addition, I
examined the sensitivity of the results to the assumption that a McDonald’s restaurant sells as
much as the other hamburger restaurants in the same mall. I find that my results concerning
the effect of exclusivity clauses on sales (through their effect on the number of hamburger
restaurants) are unchanged as long as the annual sales of a McDonald’s restaurant are above
70% of the sales of another hamburger restaurant in the same mall.
5
Discussion
The empirical analysis above provides different types of evidence concerning the determinants and effects of exclusive contracts between mall owners and hamburger restaurants. The
evidence generally supports theoretical models that emphasize the anti-competitive role of
exclusive contracts.
Furthermore, efficiency-based models of exclusive contracts do not seem to fit well with
the particular setting studied in this paper. Such theoretical models often focus on settings in
which advertising or other pre-sale services are carried out by retailers. A common argument
in these models is that when retailers face competition these “public goods” services, e.g.,
advertising, will be undersupplied because retailers are concerned that competing retailers will
free-ride on their investments. These models stress that exclusive contracts can solve these
incentive problems because retailers that operate under exclusive contracts are assured that
competing retailers will not free-ride on their investments. In contrast to the setting in these
models, advertising in the fast-food industry is carried out almost exclusively at the national,
rather than the retailer, level. Thus, concerns that the extent of advertising is affected by
whether a particular restaurant operates under exclusive contracts are likely unwarranted.
20
Also, because fast-food restaurant chains invest substantial resources in enhancing uniformity
and standardization across their restaurants (Ater and Rigbi (Forthcoming)) it is difficult to see
how an exclusive contract between a shopping mall and a chain-affiliated fast-food restaurant
would significantly change the conduct of that restaurant compared to other restaurants from
the same chain that do not operate under an exclusive contract.
Still, concluding that these exclusive contracts necessarily lead to lower consumer surplus might be premature for several reasons. First, when the space allocated to hamburger
chains in a mall is limited, the space available for other retailers (e.g., ice cream vendors)
increases. Hence, one may need to compare the effects of the reduced variety in the hamburger
chain market to those of the increased variety in the ice cream market.19 Second, the magnitude of the adverse effect of exclusive contracts on consumers also depends on the availability
of other quick meal options in the mall. To the extent that there are such alternatives, the
effect on consumers may be limited. Third, the empirical analysis in this paper may not capture some of the benefits associated with exclusive contracts. For instance, exclusive contracts
may allow mall owners to attract anchor tenants at the early stages of establishing a mall or to
induce other specific investments. To the extent that these efficiencies exist and do not affect
the sales by hamburger restaurants, the negative effect of the exclusive arrangements might be
overstated.
6
Concluding remarks
Both the motivations behind and the implications of exclusive contracts have drawn considerable attention from economists, legal scholars, and practitioners. Yet, despite the extensive
body of theoretical literature and the contentious policy debate over exclusive contracts, there
19
Arguably, the overall effect of exclusive contracts between hamburger restaurants and shopping malls on
consumer surplus should be negative because the adoption of exclusive contracts distorts the optimal mix of
stores in the mall. In other words, if having one hamburger restaurant and one ice cream vendor rather than
two hamburger restaurants makes the mall more attractive for consumers (and hence leads to higher consumer
spending), then mall owners should prefer to lease space to an ice cream vendor rather than to a second
hamburger restaurant (regardless of the use of exclusive contracts). However, if, as the evidence suggests, the
use of exclusive contracts affects the chosen mix of stores in the mall then it seems likely that mall owners adopt
exclusive contracts to extract revenues from the incumbent restaurant at the expense of consumer surplus. The
theoretical model in appendix A formalizes this point.
21
is almost no empirical evidence relating to these contracts. In this paper, I have attempted to
address this gap in the literature. Using a unique data set comprising characteristics of malls in
Israel, hamburger restaurant sales, and data on the adoption of exclusivity clauses, I examined
both the sources and implications of these exclusive arrangements. I found that exclusivity
clauses are less likely to be adopted in large malls and in malls that face more competition
from nearby malls. I also find that exclusive contracts are less likely to have been adopted
by malls that were open to the public since before the entry of McDonald’s and Burger King
into the Israeli market. Following the entry of these chains, the local hamburger chain market
became an oligopoly, and hamburger chains began incorporating exclusivity clauses into their
contracts. I take advantage of this unforeseen change in the market structure, to estimate an
instrumental variable regression that examines the effect of exclusive contracts on the number
of hamburger restaurants and on hamburger sales. I find a strong negative relationship between exclusive contracts and the number of hamburger restaurants and also a negative effect
of exclusive contracts on total hamburger sales. Overall, my findings regarding the private
incentives to adopt exclusive contracts and their effects are generally consistent with vertical
foreclosure models.
Taken together, the findings of this paper provide novel evidence that exclusivity clauses
may have anti-competitive effects. The implications of my results are potentially relevant to
other settings in which a dominant firm denies access to the essential good it produces. For
example, my analysis might be relevant for media and internet platforms that sign exclusive
arrangements with advertisers. Though the specific effects might vary, the analysis in this
paper could guide the analysis in these cases as well.
References
Aghion, P. and Bolton, P.: 1987, Contract as a barrier to entry, American Economic Review
77(3), 388–401.
Asker, J.: 2005, Diagnosing foreclosure due to exclusive dealing, http://www.johnasker.com/
22
OWPs.html.
Ater, I. and Rigbi, O.: Forthcoming, Price control and advertising in franchising chains, Strategic Management Journal .
Bar-Isaac, H. and Gavvazza, A.: 2013, Brokers contractual arrangements in the manhattan residential rental market, https://sites.google.com/site/heskibarisaac/home/
abstracts.
Bernheim, B. D. and Whinston, M. D.: 1998, Exclusive dealing, Journal of Political Economy
106, 64–103.
Chipty, T.: 2001, Vertical integration, market foreclosure, and consumer welfare in the cable
television industry, American Economic Review 91, 428–453.
Clarkson, K. W. and Muris, T. J.: 1981, Federal Trade Commission since 1970: Economic Regulation and Bureaucratic Behavior; Exclusionary Practices: Shopping Center Restrictive
Covenants, Cambridge University Press.
Cooper, J. C., Froeb, L. M., O’Brien, D. and Vita, M. G.: 2005, Vertical antitrust policy as a
problem of inference, International Journal of Industrial Organization 23, 639–664.
Fershtman, C. and Gandal, N.: 1998, The effect of the arab boycott on israel: The automobile
market, RAND Journal of Economics 29, 193–214.
Hart, O. and Tirole, J.: 1990, Vertical integration and market foreclosure, Brookings Papers
on Economic Activity: Microeconomics 205-276 .
Kalnins, A.: 2004, An empirical analysis of territorial encroachment within franchised and
company-owned branded chains, Marketing Science 23(4), 476–489.
Krattenmaker, T. G. and Salop, S.: 1986, Anticompetitive exclusion: Raising rivals’ costs to
achieve power over price, Yale Law Journal 96, 209–293.
Kuhn, K. and Vives, X.: 1999, Excess entry, vertical integration and welfare, Rand Journal of
Economics 30, 575–603.
23
Lafontaine, F. and Slade, M.: 2008, Handbook of Antitrust Economics, Exclusive Contracts
and Vertical Restraints: Empirical Evidence and Public Policy, MIT Press, pp. 391–414.
Martin, S., Normann, H.-T. and Snyder, C. M.: 2001, Vertical foreclosure in experimental
markets, RAND Journal of Economics 32, 466–496.
Marvel, H. P.: 1982, Exclusive dealing, Journal of Law and Economics 25, 1–25.
Marx, L. and Shaffer, G.: 2007, Upfront payments and exclusion in downstream markets, Rand
Journal of Economics 38, 823–843.
Miklos-Thal, J., Rey, P. and Verge, T.: 2011, Buyer power and intrabrand competition, Journal
of the European Economics Association 9, 721–741.
Nurski, L. and Verboven, F.: 2013, Exclusive dealing as a barrier to entry? evidence from
automobiles, http://www.econ.kuleuven.be/public/ndbad83/Frank/Papers.htm.
Rasmusen, E. B., Ramseyer, J. M. and Wiley, J. S.: 1991, Naked exclusion, American Economic
Review 81, 1137–1145.
Rey, P. and Tirole, J.: 2007, Handbook of Industrial Organization, A Primer on Foreclosure,
Vol. 3, North-Holland, Amsterdam.
Sass, T.: 2005, The competitive effects of exclusive dealing: Evidence from the u.s. beer
industry, International Journal of Industrial Organization 23, 203–225.
Suzuki, A.: 2009, Market foreclosure and vertical merger: A case study of the vertical merger
between turner broadcasting and time warner, International Journal of Industrial Organization 27, 532–543.
Telser, L.: 1960, Why should manufacturers want fair trade?, Journal of Law and Economics
3, 86–103.
Whinston, M.: 2006, Lectures on Antitrust Economics, MIT Press.
24
Burger King - 2002 Sales, Rent & Sales promotion (1000*shekels)
Sales
Sales
All restaurants
Mall restaurants
# of restaurants
56
23
Mean
2360
3091
Std.
1081
1140
Min
692
813
Max
5568
5568
Rent
Rent
All restaurants
Mall restaurants
56
23
254
292
146
176
51
111
707
707
Sales Promotion
Sales Promotion
All restaurants
Mall restaurants
56
23
2
2
3
1
0
0
25
5
Min
718
1173
Max
6037
4396
BurgeRanch - 2002 Sales (1000*shekels )
Sales
Sales
All restaurants
Mall restaurants
# of restaurants
71
29
Mean
2266
2590
Std.
1065
937
Table 1: Descriptive statistics for Burger King and BurgeRanch restaurants in 2002
Throughout the paper, the figures are in thousand Israeli Shekels (1 dollar ≈ 4 shekels).
25
Panel A: malls where McDonald's operates under an exclusive clause (N=24)
Mean
Std. Dev.
Mall competition (5km)
2.92
2.87
Number of stores in the mall
69.46
60.74
Mall size (1000*m2)
13.05
9.66
Number of hamburger restaurants (2 km)
0.46
1.06
Power center
0.17
0.38
Per capita income (*1000 shekels)
3.36
0.83
Mean number of hamburger restaurants in a mall
1.17
0.48
Panel B: malls where Burger King operates under an exclusive clause (N=15)
Mean
Std. Dev.
2.67
1.63
Mall competition (5km)
78.53
58.54
Number of stores in the mall
Mall size (1000*m2)
13.93
9.13
0.67
1.05
Number of hamburger restaurants (2 km)
0.20
0.41
Power center
3.41
0.77
Per capita income (*1000 shekels)
1.07
0.26
Mean number of hamburger restaurants in a mall
Panel C: malls where BurgeRanch operates under an exclusive clause (N=14)
Mean
Std. Dev.
1.71
2.43
Mall competition (5km)
53.64
29.08
Number of stores in the mall
Mall size (1000*m2)
9.11
4.05
0.57
0.76
Number of hamburger restaurants (2 km)
0
0
Power center
3.08
0.81
Per capita income (*1000 shekels)
1
0
Mean number of hamburger restaurants in a mall
Panel D: malls in which no exclusive clause was adopted (N=15)
Mean
Std. Dev.
3.80
2.54
Mall competition (5km)
120.53
49.37
Number of stores in the mall
Mall size (1000*m2)
22.10
10.12
0.73
1.44
Number of hamburger restaurants (2 km)
0.13
0.35
Power center
3.50
0.73
Per capita income (*1000 shekels)
Mean number of hamburger restaurants in a mall
2.13
0.51
Table 2: Summary statistics for malls, by chain and adoption of exclusive clauses
The different panels show summary statistics for the malls in which the different hamburger
chains adopt exclusive contracts with malls. Mall competition refers to the number of malls
located within 5 kilometers from a given mall. The number of hamburger restaurants variable
counts the number of hamburger restaurants located outside a given mall and within a radius
of 2 kilometers from the mall. Other variables are explained in the text.
26
Panel A - adoption of exclusive clauses and mall size
Mall size
Small
Intermediate
Large
Number of malls
25
25
18
Number of malls that adopt exclusive clauses
24
20
9
Number of malls with one hamburger restaurant
25
20
5
Number of malls with two hamburger restaurants
0
5
9
Number of malls with three hamburger restaurants
0
0
4
Panel B - adoption of exclusive clauses and mall competition
Mall competition (number of nearby malls)
0-1
2-3
3+
Number of malls
25
19
24
0.92
0.73
0.66
Fraction of malls that adopt exclusive clauses
Table 3: Summary statistics on adoption of exclusive clauses, mall size and mall competition
Panel A presents descriptive statistics for the relationship between the adoption of exclusivity
clauses and mall size. Small malls are defined as having commercial space of less than 9,000 m2 ;
intermediate size malls, defined as being larger than 9,000 m2 and smaller than 18,000 m2 ; and
large malls, with commercial area of more than 18,000 m2 . Panel B displays evidence of the
the relationship between adoption of exclusive clauses and mall competition. Mall competition
is measured by the number of competing malls located within a radius of 5 kilometers of a
given mall.
27
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
The dependent variables indicates whether an exclusive clause is adopted by the hamburger chain and the mall
All
Malls
All
Malls
All
Malls
All
Malls
All
malls
with
malls
with
malls
with
malls
with
malls
sales
sales
sales
sales
Malls
with
sales
Variables
D1993
-0.32***
-0.28*
-0.27**
-0.32**
-0.29**
(0.12)
(0.15)
(0.11)
(0.13)
(0.11)
(0.13)
-0.02
-0.05*
-0.01
-0.07*
Mall competition
-0.04*
-0.07**
(0.02)
(0.03)
Mall size (in m2)
(0.02)
(0.03)
(0.03)
(0.04)
-0.02***
-0.03***
-0.02***
-0.02***
-0.03**
-0.04*
(0.01)
(0.01)
(0.01)
(0.01)
(0.01)
(0.02)
Number of stores
Per capita income
# of hamburger restaurants (2km)
Power center
Constant
Observations
R-squared
-0.32**
0.01
0.01
(0.01)
(0.01)
-0.06
-0.05
(0.06)
(0.08)
0.01
0.09
(0.05)
(0.07)
0.18
0.15
(0.22)
(0.28)
0.85***
0.74***
0.87***
0.84***
1.04***
1.05***
1.14***
1.25***
1.34***
1.44***
(0.05)
(0.08)
(0.08)
(0.11)
(0.08)
(0.12)
(0.09)
(0.12)
(0.22)
(0.29)
68
44
68
44
68
44
68
44
68
44
0.10
0.07
0.04
0.10
0.18
0.27
0.27
0.41
0.31
0.48
*** p<0.01, ** p<0.05, * p<0.1
Standard errors in parentheses
Table 4: Determinants of exclusivity clauses
The dependent variable is a dummy variable indicating whether the lease agreement of the
hamburger chain that operates in the mall includes an exclusivity clause. D1993 is an indicator
variable which equals one if the mall was open before 1993. The mall competition variable
corresponds to the number of malls located within a radius of 5 kilometers from a given mall
and mall size refers to a mall leasable area in m2 . Other variables are explained in the text. In
odd numbered columns, the sample includes all the malls, including malls where McDonald’s
is the only chain that operates in the mall. In even numbered columns, the sample includes
malls where BurgeRanch, Burger King or both chains operate a restaurant in the mall, i.e.
malls for which sales data are available.
28
(1)
(2)
Dependent variable is the number of mall hamburger restaurants
2sls
All malls
Variables
EXC
-0.62***
(0.24)
Mall competition
0.01
(0.02)
Mall size (in m2)
0.02**
(0.01)
Number of stores
0.02**
(0.01)
Per capita income
0.04
(0.04)
# of hamburger restaurants (2km)
-0.01
(0.02)
Power center
-0.12
(0.14)
Constant
1.12***
(0.32)
Observations
68
R-squared
0.84
*** p<0.01, ** p<0.05, * p<0.1 Standard errors in parentheses
2sls
Malls with sales
-0.69**
(0.21)
0.01
(0.02)
0.03***
(0.01)
0.001
(0.01)
0.06
(0.04)
-0.01
(0.02)
-0.29*
(0.15)
1.16***
(0.32)
44
0.89
Table 5: Regression results for the number of mall hamburger restaurants
The table shows the results for 2sls regressions in which the dependent variable is the number of
hamburger restaurants in the mall. The sample of malls in column 1 include all the malls where
at least one hamburger restaurant operates. The sample in column 2 contains only shopping
malls for which sales data are available. EXC is a dummy variable indicating whether an
exclusivity clause is adopted between the mall and the hamburger chain. I use the mall
opening date, before or after 1993, as an instrument for the decision to adopt the exclusivity
clause. Other variables are explained in the text.
29
Dependent variable:
Variables
EXC
(1)
(2)
total hamburger sales
2sls
ols
(3)
sales per restaurant
2sls
-2,625*
(1,349)
257.6
(776.1)
-31.12
(164.81)
Mall size (in m2)
-8.35
(66.60)
Number of stores
30.58***
(9.61)
Per capita income
417.0
(285.8)
# of hamburger restaurants (2km)
71.39
(145.9)
Power center
279.6
(945.5)
Constant
1,858
(2,066)
Observations
44
R-squared
0.77
*** p<0.01, ** p<0.05, * p<0.1
2,218***
(807.0)
43.46
44.26
(140.4)
(94.76)
-46.34
-34.43
(85.28)
(38.30)
28.71**
15.61***
(12.21)
(5.524)
348.1
342.0**
(284.9)
(164.3)
29.14
-21.30
(143.0)
(83.89)
752.7
590.1
(972.7)
(543.8)
-2,194**
557.8
(1,076)
(1,188)
44
44
0.79
0.39
Standard errors in parentheses
Number of hamburger restaurants
Mall competition
Table 6: Regression results for the effect of exclusive contracts on hamburger sales
Columns 1 and 2 present regression results in which the dependent variable is the total annual
sales of the hamburger restaurants in a mall. In columns 1, the exclusive clause variable is
instrumented by a dummy variable indicating whether the mall was opened before or after
1993, the year in which McDonald’s and Burger King entered the Israeli market. In column
2, instead of the exclusive clause variable, I use the fitted value of the number of hamburger
restaurants in the mall, obtained from equation 2 (Table 5). Column 3 shows the 2sls regression
results using the average hamburger restaurant sales as the dependent variable. Like in column
1, I use the D1993 indicator, which equals one if the mall was opened before 1993, to instrument
for the decision to adopt an exclusive clause. Other variables are explained in the text.
30
Figure 1: Total mall hamburger sales as a function of the total number of stores
Total sales by mall hamburger restaurants are plotted against the total number of mall stores.
Malls that do not adopt exclusive contracts with a hamburger chain are denoted by hollow
circles and the size of the circle corresponds to the number of hamburger restaurants in a given
mall. Malls that were open before McDonald’s and Burger King entered the Israeli market are
denoted by a small x.
31
A
Appendix A - a theoretical model
The theoretical model can be used to guide the empirical analysis presented in the paper.
The model establishes the following predictions: First, larger malls are less likely to adopt
exclusivity clauses with hamburger restaurants. Second, there exists a negative relationship
between the adoption of exclusivity clauses and the number of hamburger restaurants in the
mall. Third, exclusive clauses have a negative effect on total mall hamburger sales.
Let π(n, s) denote the per restaurant gross profits (not including the rent payments to
the mall) when a total of n hamburger restaurants operate at a mall with s stores. Here, s
can be thought of as a proxy for the demand for hamburgers in the mall. It is assumed that
πn‘ is weakly decreasing (e.g. due to business stealing) and that πs‘ is weakly increasing in s.
“ is weakly negative, implying that the business-stealing effect becomes weaker
In addition, πn,s
as the total number of stores in the mall increases.
Restaurants pay a share α of their gross profits to the mall owner, where α ∈ (0, 1).
An additional payment, ED(n, s), is made if the mall owner commits to not allowing a second
restaurant to enter the mall. Signing an exclusivity clause must be beneficial for both the
restaurant and the mall owner. The incumbent restaurant will pay to prevent entry if, without
an exclusive contract, entry will take place and reduce the incumbent’s profits. The ED
payment is determined as a function of the losses that the incumbent restaurant will incur if
entry occurs. Hence, ED = κ[π(1, s)−π(2, s)] where κ ∈ (0, 1).20 Finally, a is the rent the mall
would earn from the best available non-hamburger outlet alternative. It is assumed that more
attractive retailers enter the mall before less attractive retailers. Hence, there is an inverse
relationship between a and s, the number of stores already in the mall. I focus on a situation
in which n ∈ {0,1,2}; thus, adoption of exclusivity clauses is an issue at the margin between
1 and 2 restaurants. I consider first a situation in which exclusivity clauses are possible and
compare it to the situation when exclusivity clauses are not possible. The following market
structure is derived when exclusivity clauses are possible:
20
A simplifying assumption that I use in the model is that the rival restaurant does not participate in the
contracting stage. This can occur, for instance, if the mall owner incurs transaction costs if she simultaneously
deals with multiple chains. Bernheim and Whinston (1998) offer a full-fledged model that shows how relaxing
this assumption does not affect the results.
32
α ∗ π(1, s) < a(s) ⇒ n∗ = 0
α(2π(2, s) − π(1, s)) < a(s) < α ∗ π(1, s) ⇒ n∗ = 1
(1)
α(2π(2, s) − π(1, s)) − ED(n, s) < a(s) < α(2π(2, s) − π(1, s)) ⇒ n∗ = 1
α(2π(2, s) − π(1, s)) − ED(n, s) > a(s) ⇒ n∗ = 2
The structure implies that the larger the number of stores, the larger the number of
hamburger restaurants that operate in the mall. If exclusivity clauses are not allowed, then the
market structure is changed in cases in which ED payments were previously used to prevent
entry. In particular, the following structure is obtained:
α ∗ π(1, s) < a(s) ⇒ n∗∗ = 0
α(2π(2, s) − π(1, s)) < a(s) < α ∗ π(1, s) ⇒ n∗∗ = 1
(2)
a(s) < α(2π(2, s) − π(1, s)) ⇒ n∗∗ = 2
A comparison of the industry structure under the two regimes is plotted in Figure
2a for different values of s. s∗1 , the minimum number of mall stores required to sustain one
restaurant, is given implicitly by α ∗ π(1, s∗1 ) = a(s∗1 ); s∗ED , the minimum number of mall
stores for which the mall owner signs an effective exclusive contract, is given implicitly by
α(2π(2, s∗ED ) − π(1, s∗ED )) = a(s∗ED ). In addition, s∗2 ,the minimum number of mall stores
for which the mall owner would lease space to two hamburger restaurants, is given implicitly
by α(2π(2, s∗2 ) − π(1, s∗2 )) − ED(n, s∗2 ) = a(s∗2 ). It can be shown that s∗1 < s∗ED < s∗2 . Note
that when exclusive clauses are possible, there are two cases in which one restaurant operates
in the mall. For malls with relatively few stores, between s∗1 and s∗ED , the mall owner’s
alternative is more attractive than the additional rent from a second hamburger restaurant.
Therefore, within this range, an exclusivity clause (if it exists) is superfluous. For malls with
an intermediate number of stores, s∗ED < s < s∗2 , the threat of entry becomes likely because
the mall’s rent from a non-hamburger restaurant becomes lower and the additional rent from
a second restaurant is larger than it is in small malls. It is in this range where exclusivity
clauses directly affect the number of hamburger restaurants and total sales of hamburger
33
restaurants. Finally, for malls with a relatively large number of stores, s > s∗2 , the rent from
a non-hamburger restaurant is low, and due to the high differentiation across retailers, the
willingness of the incumbent hamburger restaurant to pay for an exclusive contract drops. As
a result, in large malls exclusivity agreements will not be signed, and a second restaurant will
enter the mall.
Letting q(n,s) represent per-firm hamburger restaurant sales and Q(n, s) = nq(n, s)
represent total hamburger sales in the mall, it is straightforward to show that the total quantity
sold by hamburger restaurants is lower when exclusive contract is adopted. This is illustrated
graphically in Figure 2b.
34
Figure 1: Graphic illustration of the main results of the model
The blue dotted line corresponds to the equilibrium when exclusive contracts are possible. The black
solid line shows the predicted changes in the number of hamburger restaurants in the mall and in
the total quantity sold by hamburger restaurants if exclusive contracts are prohibited. As the figure
shows, removing exclusive contracts leads to entry of an additional hamburger restaurant in malls with
intermediate size. Furthermore, total hamburger sales are lower in malls in which the exclusive contracts
are effective in preventing entry.
35
B
Appendix B - apparel sales data
In the main text, I use the opening date of a shopping mall – before or after 1993 – as an
instrumental variable that helps identify the effect of exclusive contracts on total sales by
hamburger restaurants in a given mall. The validity of the instrumental variable is threatened
if malls that opened before 1993, the year in which McDonald’s and Burger King entered the
Israeli market, secured better locations, and hence attract more shoppers. In this appendix
I show regression results that demonstrate that malls that opened before 1993 are not more
attractive than malls opened after 1993. Such evidence supports the validity of using the mall
opening date as an instrumental variable when estimating the effect of exclusivity clauses on
sales by hamburger restaurants.
The apparel data come from an Israeli retail consultancy firm that obtains monthly
data on several retail chains that operate in shopping malls across Israel. The monthly data
span from January 2006 to August 2010. I aggregate the data to obtain an average measure
for each mall and focus on malls that are included in my 2002 sample. In particular, I estimate
the following equation:
Apparel Salesi = α1 + β1 ∗ D1993,i + γ1 ∗ N umber of Storesi + δ1 ∗ Xi + i
(3)
The dependent variable is the mall average apparel sales per square meter which serves
as a measure for the attractiveness of the mall. I use this measure rather than total mall
apparel sales because not all apparel stores report their sales to the consultancy firm and hence
a measure of total apparel sales is not available. Other regressors are similar to the regressors
in equation 2 in the main text, except that I replace the EXC variable with a dummy variable
D1993 . The coefficient of interest is β. The results are reported in Table B1 and indicate that
malls that were opened before 1993 do not have higher apparel sales per square meter; thus,
these results mitigate the concern that the instrumental variable regression results presented
in the main text are driven by the better locations of malls that opened before 1993.
36
(1)
(2)
Dependent variable is apparel sales per sqm.
all malls
malls with sales
Variables
D1993
-178
-324
(178)
(187)
-0.52
50.4
(46.3)
(55.3)
-29.0
-30.3
(19.5)
(24.8)
10.2***
10.7**
(3.36)
(4.31)
175*
285**
(98.3)
(121)
69.5
-3.28
(45.2)
(56.0)
137
-30.2
(360)
(423)
730**
523
(333)
(402)
57
37
0.47
0.57
Standard errors in parentheses
Mall competition
Mall size (in m2)
Number of stores
Per capita income
# of hamburger restaurants (2km)
Power center
Constant
Observations
R-squared
*** p<0.01, ** p<0.05, * p<0.1
Table B1: Apparel sales regressions
The dependent variable is apparel sales per square meter in each mall. Other regressors are
similar to the regressors in equation 2 in the main text, except that I replace the EXC variable
with a dummy variable that equals one if the mall was opened before 1993 and zero otherwise.
The sample in column 2 includes only malls for which I also have data on hamburger sales.
37