Comments on economics, mystery fiction, drama, and art.

Monday, May 02, 2005

Restrictive covenants and competiton

The Chicago Tribune reports on what is apparently a fairly common practice by super market and pharmacy chains, bothin Illinois and nationwide. When these chains close a store (on porpoerty they own), they apparently frequently write a restrictive covenant into the deed, prohibiting the use of the property as a grocery store (or pharmacy, as the case may be). Recently, Dominick's closed a 20-year-old store on the southwest side of Chicago. A small local chain wanted to buy the property for use as a grocery store, but the restrictive covenant prohibited that use. Clearly, this is an attempt by chains to reduce--or prevent--competition.

The economics of this seem pretty clear to me. If the location cannot support a grocery store, the restrictive covenant is unnecessary. Potential competitors will fail. If the location is viable, then the restriction reduces soical welfare by restricting competion, and by limiting the property rights of new owners. So prohibiting such restrictions should, I think, enhance welfare. Such a prohibition seems to me to be protecting property rights in a general sense, although the individual gorcery/pharmacy chain will, presumably, be made worse of.


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