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Royalty Rate Structure in Case of Franchising

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  • Ivan Kotliarov

    (Cand. Sc. in Economics, Associate Professor, Chair Of International Finance and Financial Markets, Faculty of Economics, National Research Uniersity Higher School of Economics)

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    Abstract

    The present article contains an analysis of differences between licensing and franchising. It is demonstrated that models of royalty rate calculation developed for licensing should not be applied to franchising as benefits received by licensee and franchisee are different. It is proposed to include in the model of royalty calculation the risk reduction generated by franchisor¡¯s effective technologies and managerial support that are given to franchisee. It is demonstrated that franchisee may wish to acquire the franchise even if franchisor takes the full amount of additional income or if this additional income is negative.

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    Bibliographic Info

    Article provided by Society for AEF in its journal Annals of Economics and Finance.

    Volume (Year): 12 (2011)
    Issue (Month): 1 (May)
    Pages: 139-156

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    Handle: RePEc:cuf:journl:y:2011:v:12:i:1:p:139-156

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    Related research

    Keywords: Royalty; Royalty rate; Franchising; Franchisee; Franchisor; Risk; Income;

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    References

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    1. Rubin, Paul H, 1978. "The Theory of the Firm and the Structure of the Franchise Contract," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 21(1), pages 223-33, April.
    2. Steven C. Michael, 2009. "Entrepreneurial signaling to attract resources: the case of franchising," Managerial and Decision Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 30(6), pages 405-422.
    3. Kaufmann, Patrick J & Lafontaine, Francine, 1994. "Costs of Control: The," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 37(2), pages 417-53, October.
    4. Blair,Roger D. & Lafontaine,Francine, 2005. "The Economics of Franchising," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521772525.
    5. Martin, Robert E, 1988. "Franchising and Risk Management," American Economic Review, American Economic Association, American Economic Association, vol. 78(5), pages 954-68, December.
    6. James A. Brickley, 2002. "Royalty Rates and Upfront Fees in Share Contracts: Evidence from Franchising," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 18(2), pages 511-535, October.
    7. Mathewson, G Frank & Winter, Ralph A, 1985. "The Economics of Franchise Contracts," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 28(3), pages 503-26, October.
    8. Lafontaine, Francine, 1993. "Contractual Arrangements as Signaling Devices: Evidence from Franchising," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 9(2), pages 256-89, October.
    9. Francine Lafontaine & Kathryn L. Shaw, 1996. "The Dynamics of Franchise Contracting: Evidence from Panel Data," NBER Working Papers 5585, National Bureau of Economic Research, Inc.
    10. Rao, Ram C & Srinivasan, Shubashri, 1995. "Why Are Royalty Rates Higher in Service-Type Franchises?," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 4(1), pages 7-31, Spring.
    11. Luis Vázquez, 2005. "Up-front Franchise Fees and Ongoing Variable Payments as Substitutes: An Agency Perspective," Review of Industrial Organization, Springer, Springer, vol. 26(4), pages 445-460, 06.
    12. Norton, Seth W, 1988. "An Empirical Look at Franchising as an Organizational Form," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 61(2), pages 197-218, April.
    13. Francine Lafontaine, 1992. "Agency Theory and Franchising: Some Empirical Results," RAND Journal of Economics, The RAND Corporation, vol. 23(2), pages 263-283, Summer.
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