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Information Structure and Contractual Choice in Franchising

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Author Info
Debajyoti Chakrabarty
Ananish Chaudhuri
Chester Spell

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Abstract

We develop a formal model to explain the existence of dual distribution in franchising by assuming variations in location profitability. We posit that location quality dictates the choice between franchising and company ownership. We analyze the contract choice problem when location quality is (1) private information for the franchisor; (2) private information for the franchisee, and (3) common knowledge. We show that (1) can result in the coexistence of company-owned and franchised stores. Under (2) all stores will be franchised. (3) can lead to only company-owned stores or only franchised outlets, depending on monitoring costs.

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Publisher Info
Article provided by Mohr Siebeck, Tübingen in its journal Journal of Institutional and Theoretical Economics.

Volume (Year): 158 (2002)
Issue (Month): 4 (December)
Pages: 638-
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Handle: RePEc:mhr:jinste:urn:sici:0932-4569(200212)158:4_638:isacci_2.0.tx_2-s

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Related research
Keywords:

Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

Cited by:
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  1. Sebastian Kranz & Shira B. Lewin-Solomons, 2008. "Decision Structures in Franchise Systems of the Plural Form," Bonn Econ Discussion Papers bgse8_2008, University of Bonn, Germany. [Downloadable!]
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This page was last updated on 2009-12-10.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.