Managerial Economics & Organizational Architecture 6th Edition by James Brickley , Clifford Smith ,Jerold Zimmerman

Exercise 15

ANALYZING MANAGERIAL DECISIONS: Oil Industry Distribution Systems
Major oil companies use a dual distribution system for gasoline. Some stations are direct-serve , where the oil company delivers gasoline to the station. Other stations are served by distributors. Distributors are independent businesspeople who buy gas from the oil company and sell it to stations. Distributors also own their own stations. The land, tanks, and equipment at the direct-serve stations are owned by the oil company and leased to the dealer (franchisee). The dealer buys gas from the oil company and pays rent for the land. The dealer keeps the profits from the station over the life of the lease. (Some direct-serve stations are centrally owned by the oil company. At these locations, the oil company hires a manager to operate the station.) At direct-serve stations, the oil company is responsible for environmental cleanup, local advertising, monitoring of the station (to protect the brand name), and so on. The distributors are responsible for these activities at the stations they serve. Typically the oil company sells gas to distributors at about 7 cents less per gallon than it sells gas to dealers at its direct-serve stations.
Typically the stations served (and owned) by distributors are located in rural areas, whereas the direct-serve stations are located in urban areas. Give two economic reasons to explain why you might expect such a pattern.