February 10, 2009

Collegetown Eateries Evade Competition

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If you want a grilled chicken salad in Collegetown, it might be harder to find one than you think. When a customer at Jack’s Collegetown Grill ordered a grilled chicken salad recently, she was disappointed to find out that the item was not on the menu. The employee explained that salads were not offered on the menu as a result of a non-competition agreement with many of the restaurants in the area, particularly on Dryden Rd. She offered to sell a salad with grilled chicken separately, and the customer was told to just combine them.
A non-compete clause, sometimes called a covenant not to compete (CNC), is legal and very typical in plazas and shopping malls, Jason Burnham, owner of Jason’s Deli and Grocery on College Ave. said. It is a contractual agreement, usually negotiated in a lease, in which one party agrees not to pursue a similar profession or trade in competition again[img_assist|nid=34921|title=No chicken salad here|desc=Restaurants in Collegetown like Jack’s are engaged in non-competition agreements, which according to a University professor, have the effect of a cartel.|link=node|align=right|width=|height=0]st another party under the same owner. Although it is legal, it has been likened to a cartel, with similar features.
A cartel is an alliance or an agreement among firms to regulate pricing, production or marketing of goods aimed at limiting competition. The agreement allows firms to explicitly discuss how each will operate and create a monopoly by joining hands.
Kevin Sullivan, general manager of Jack’s Collegetown Grill expanded on the agreement between the restaurants. If Aladdin’s is only allowed to sell salads, there is a limit on competition, allowing them to possibly set their prices accordingly. When asked if there was potential to lead to a monopoly or price fixing, Sullivan said yes, but that “certainly there is a fine line line between a non-competition deal and property rights.” In other words, it’s not considered competition if the same owner controls both properties.
According to Sullivan, the landowner has the right to rent property or not to if his interest was to open up a restaurant in direct competition with a place like Aladdin’s because of the possibility to put them out of business.
“I’m definitely in favor of competition. The less competition there is, the more you can raise your prices if you choose to,” agreed Sullivan. “I actually negotiated the opportunity to sell a side salad so it’s kind of a middle ground,” he said.
It appears that this non-compete clause in the contract of restaurants like Jack’s Collegetown Grill and Aladdin’s Natural Eatery is not paralleled by restaurants on College Ave. Not only do restaurants on College Ave. not have such an agreement, but many businesses were unaware that such an agreement exists among their competitors around the corner.
According to Prof. Thomas Evans, Policy Analysis and Management, fixing menu items essentially has the same effect as fixing prices. He describes the restaurants’ non-compete agreement as allowing them to operate in a way a cartel would.
“By agreeing to not compete with each other by not offering certain menu items, each individual restaurant has the ability to drive up its price. In this sense it is exactly like a cartel. A cartel can restrict quantity so that each firm can drive up the price. Here, the restaurants restrict the number of items that are offered,” said Evans.
“In general, most businesses respect each other, if there is more traffic in the streets, best interest for everyone,” Sullivan said.
Evans, however, said that it is really in the best interest of the landlord, not the businesses. Although restaurants may seem to gain from the non-competition agreement, it is really the landlord who is the true beneficiary.
“They are certainly trying to be a cartel; there is no question about that,” said Evans. “If they keep buying extra lots, eventually they are going to get to the point where they do control enough of the real estate to form cartels. There’s certainly the potential,” he said.
“There is no doubt that that is the objective: to restrict choice, to drive up price, to make more money. The question is who is making it? I think that you have to point to the landlord, as the one who is ultimately making money. The landlord, in each of the restaurants it rents to, makes more money so then it can charge more in rent and it can keep driving the rent up to the point where each of these restaurants is breaking even,” said Evans.
“The firm that is gaining the most from this is the person who owns a scarce resource, which is the landlord owning the land,” he added.
There is acknowledgment that this type of agreement exists but whether it has an impact is still uncertain. Because this landlord doesn’t own all of Collegetown, rather just a portion of a block, the force of competition from restaurants on nearby streets is enough to prevent any sort of monopoly from occurring.
Sullivan expressed his concerns about Cornell’s City Bucks program’s impact on competition in the Collegetown area. City Bucks is a program through Cornell Dining that allows registered students and faculty with a current and valid Cornell ID to make purchases at numerous participating off-campus restaurants and supermarkets. Cornell “basically created their own currency only accepted in certain locations,” said Sullivan.
Sullivan described that when Jack’s Collegetown Grill first opened, a large number of students came in with their Cornell IDs wanting to use their City Bucks and unfortunately he could not accept them. Those businesses accepting City Bucks were at an advantage since City Bucks customers accounted for a large portion of their business.
“Cornell is allowing some restaurants and businesses to accept City Bucks and denying others access to it. They seem to be accepting applications but not approving them. We’ve been trying to get on the program for a little over three years now,” Sullivan said.