Journal of Law and Political Economy

Applying a simple model to a data set created from 530 franchise contracts, this article shows that the loosening of antitrust restrictions on vertical restraints—competition restrictions in agreements between firms at different levels of the production and distribution process—allows trademarked brands to control wages and working conditions across the boundaries of the firm, at legally separate franchised establishments. Some vertical restraints reduce the bargaining power of franchisees, causing them to exert extraordinarily high effort levels. Other vertical restraints limit franchisee discretion and focus their efforts on labor cost and labor discipline for their profit margins. By monitoring the franchisees who monitor workers, franchisors control wages at franchised establishments without incurring the legal responsibilities and liabilities of traditional employment. To properly regulate franchising and other similar contracting arrangements, antitrust and labor law should be brought together rather than considered in isolation.