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Franchising as a plural system: A risk-based explanation

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  • Bürkle, Thomas
  • Posselt, Thorsten

Abstract

Empirical studies show that most franchise systems consist of both franchisee-owned and franchisor-owned units. We contribute a new theory that explains why such a mixture exists, using a model that focuses on the franchisor's optimal risk allocation. The costs of risk and controlling franchised units explain the varying fraction of franchisee-owned to total selling units, and the incentive to franchise decreases with an increasing fraction of franchisee-owned to total selling units, as well as with decreasing costs of control. Our explanation for these plural systems is consistent with the ownership redirection hypothesis.

Suggested Citation

  • Bürkle, Thomas & Posselt, Thorsten, 2008. "Franchising as a plural system: A risk-based explanation," Journal of Retailing, Elsevier, vol. 84(1), pages 39-47.
    • Handle: RePEc:eee:jouret:v:84:y:2008:i:1:p:39-47
    DOI: 10.1016/j.jretai.2008.01.004
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    Cited by:

    1. Evelien P. M. Croonen & Marko Grünhagen & Melody L. Wollan, 2016. "Best fit, best practice, or stuck in the middle? The impact of unit ownership on unit HR performance in franchise systems," International Entrepreneurship and Management Journal, Springer, vol. 12(3), pages 697-711, September.
    2. Cintya Lanchimba, 2013. "Optimal Monetary Provisions in Plural Form Franchise Systems; A Theoretical Model of Incentives with Two Risk-Averse Agents," Working Papers halshs-00830899, HAL.
    3. Sawant, Rajeev J. & Hada, Mahima & Blanchard, Simon J., 2021. "Contractual Discrimination in Franchise Relationships," Journal of Retailing, Elsevier, vol. 97(3), pages 405-423.
    4. Philippe Cyrenne, 2016. "The Determinants of Dual Distribution Revisited," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 23(2), pages 167-182, July.
    5. Grünhagen, Marko & Zheng, Xu (Vivian) & Wang, Jeff Jianfeng, 2017. "When the Music Stops Playing: Post-litigation Relationship Dissolution in Franchising," Journal of Retailing, Elsevier, vol. 93(2), pages 138-153.
    6. Melih Madanoglu & Gary J. Castrogiovanni, 2018. "Franchising proportion and network failure," Small Business Economics, Springer, vol. 50(4), pages 697-715, April.
    7. Grace, Debra & Weaven, Scott, 2011. "An Empirical Analysis of Franchisee Value-in-Use, Investment Risk and Relational Satisfaction," Journal of Retailing, Elsevier, vol. 87(3), pages 366-380.
    8. Josef Windsperger, 2013. "The governance of franchising networks," Chapters, in: Anna Grandori (ed.), Handbook of Economic Organization, chapter 27, Edward Elgar Publishing.
    9. Frédéric Perdreau & Anne-Laure Le Nadant & Gérard Cliquet, 2010. "Plural Form and Franchisors Performance : Early Empirical Findings From Europe," Post-Print halshs-00522601, HAL.
    10. Dant, Rajiv P. & Brown, James R., 2008. "Bridging the B2C and B2B Research Divide: The Domain of Retailing Literature," Journal of Retailing, Elsevier, vol. 84(4), pages 371-397.
    11. Catherine Allix-Desfautaux & Magali Chaudey & Muriel Fadairo & Nabil Khelil & Anne-Laure Le Nadant & Frédéric Perdreau & Fanny Simon-Lee, 2014. "Conditions d'émergence et de diffusion de l'innovation au sein des réseaux de franchise," Working Papers hal-01675707, HAL.
    12. S. Verbieren & M. Cools & A. Van den Abbeele, 2008. "Franchising. A Literature Review on Management and Control Issues," Review of Business and Economic Literature, KU Leuven, Faculty of Economics and Business (FEB), Review of Business and Economic Literature, vol. 0(4), pages 398-443.
    13. Hsu, Liwu & Kaufmann, Patrick & Srinivasan, Shuba, 2017. "How Do Franchise Ownership Structure and Strategic Investment Emphasis Influence Stock Returns and Risks?," Journal of Retailing, Elsevier, vol. 93(3), pages 350-368.
    14. Brown, James R. & Dant, Rajiv P., 2009. "The Theoretical Domains of Retailing Research: A Retrospective," Journal of Retailing, Elsevier, vol. 85(2), pages 113-128.
    15. Cintya Lanchimba, 2013. "Optimal Monetary Provisions in Plural Form Franchise Systems ; A Theoretical Model of Incentives with Two Risk-Averse Agents," Working Papers 1321, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    16. Watson, Anna & Dada, Olufunmilola (Lola) & Grünhagen, Marko & Wollan, Melody L., 2016. "When do franchisors select entrepreneurial franchisees? An organizational identity perspective," Journal of Business Research, Elsevier, vol. 69(12), pages 5934-5945.
    17. Hadjielias, Elias & Dada, Olufunmilola (Lola) & Eliades, Kostas, 2021. "Entrepreneurial process in international multiunit franchise outlets: A social capital perspective," Journal of Business Research, Elsevier, vol. 134(C), pages 13-28.
    18. Pankaj C. Patel & John A. Pearce II, 2020. "Franchisees and Loan Default on Third-Party Guarantee Loans: Evidence From the United States," Entrepreneurship Theory and Practice, , vol. 44(5), pages 861-877, September.
    19. Peter Balsarini & Claire Lambert & Maria M. Ryan & Martin MacCarthy, 2021. "Subjective Knowledge, Perceived Risk, and Information Search when Purchasing a Franchise: A Comparative Exploration from Australia," JRFM, MDPI, vol. 14(8), pages 1-17, July.
    20. Catherine Goullet & François Meyssonnier, 2009. "Le contrôle des réseaux de franchise," Post-Print halshs-00456213, HAL.
    21. Chabowski, Brian R. & Hult, G. Tomas M. & Mena, Jeannette A., 2011. "The Retailing Literature as a Basis for Franchising Research: Using Intellectual Structure to Advance Theory," Journal of Retailing, Elsevier, vol. 87(3), pages 269-284.
    22. de Jong, Abe & Jiang, Tao & Verwijmeren, Patrick, 2011. "Strategic Debt in Vertical Relations: Evidence from Franchising," Journal of Retailing, Elsevier, vol. 87(3), pages 381-392.
    23. Grewal, Dhruv & Levy, Michael & Kumar, V., 2009. "Customer Experience Management in Retailing: An Organizing Framework," Journal of Retailing, Elsevier, vol. 85(1), pages 1-14.
    24. Jaeyoung Kang, 2014. "Roles of Board of Directors in Organizational Ambidexterity," Journal of Management and Strategy, Journal of Management and Strategy, Sciedu Press, vol. 5(4), pages 99-109, November.
    25. Madanoglu, Melih & Lee, Kyuho & Castrogiovanni, Gary J., 2011. "Franchising and firm financial performance among U.S. restaurants," Journal of Retailing, Elsevier, vol. 87(3), pages 406-417.

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    More about this item

    Keywords

    Franchising; Plural systems; Optimal mixture of franchised and system leader-owned units; Insurance; Risk premium;
    All these keywords.

    JEL classification:

    • M31 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Marketing
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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