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Territorial Restrictions in Franchise Contracts

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  • Mathewson, Frank
  • Winter, Ralph

Abstract

Efficient contracts set incentives through the assignment of rights and profit shares. Although efficient contracts have been used to explain the nature of the firm, the use of contractual rights in specific business contracts is relatively unexplored. The authors analyze contractual rights in franchise systems, in particular the right to add franchisees. An exclusive territory assigned to an initial franchisee is not an immutable guarantee but rather a starting point for subsequent renegotiation in the franchise relationship. Exclusivity is, therefore, profitable when franchisee efforts are critical to the venture. A sample of franchise contracts reveals evidence consistent with the model's prediction. Copyright 1994 by Oxford University Press.

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Bibliographic Info

Article provided by Western Economic Association International in its journal Economic Inquiry.

Volume (Year): 32 (1994)
Issue (Month): 2 (April)
Pages: 181-92

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Handle: RePEc:oup:ecinqu:v:32:y:1994:i:2:p:181-92

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Cited by:
  1. Jansen, Jos, 2003. "Coexistence of strategic vertical separation and integration," International Journal of Industrial Organization, Elsevier, vol. 21(5), pages 699-716, May.
  2. Haucap, Justus & Heimeshoff, Ulrich & Klein, Gordon J. & Rickert, Dennis & Wey, Christian, 2013. "Wettbewerbsprobleme im Lebensmitteleinzelhandel," DICE Ordnungspolitische Perspektiven 48, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  3. Nancy T. Gallini & Aidan Hollis, 1996. "A Contractual Approach to the Gray Market," Working Papers gallini-96-01, University of Toronto, Department of Economics.
  4. Stanworth, John & Curran, James, 1999. "Colas, burgers, shakes, and shirkers: Towards a sociological model of franchising in the market economy," Journal of Business Venturing, Elsevier, vol. 14(4), pages 323-344, July.
  5. Hendrikse, G.W.J. & Jiang, T., 2007. "An Incomplete Contracting Model of Governance Structure Variety in Franchising," ERIM Report Series Research in Management ERS-2007-049-ORG, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
  6. Alicia García-Herrera & Rafael Llorca-Vivero, 2010. "How time influences franchise contracts: the Spanish case," European Journal of Law and Economics, Springer, vol. 30(1), pages 1-16, August.
  7. Lutz, Nancy A., 1995. "Ownership rights and incentives in franchising," Journal of Corporate Finance, Elsevier, vol. 2(1-2), pages 103-131, October.
  8. Hendrikse, G.W.J. & Jiang, T., 2005. "Plural Form in Franchising: An Incomplete Contracting Approach," ERIM Report Series Research in Management ERS-2005-090-ORG, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
  9. Ishikawa, Toshiharu & Toda, Masao, 2005. "Retail market structure and the threat by the manufacturer to sell goods directly to the consumer," Socio-Economic Planning Sciences, Elsevier, vol. 39(1), pages 43-55, March.
  10. Haucap, Justus & Klein, Gordon J., 2012. "Einschränkungen der Preisgestaltung im Einzelhandel aus wettbewerbsökonomischer Perspektive," DICE Ordnungspolitische Perspektiven 22, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  11. Olivier Cochet & Thomas Ehrmann, 2007. "Preliminary evidence on the appointment of institutional solutions to franchisor moral hazard-the case of franchisee councils," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(1), pages 41-55.
  12. David de Meza & Mariano Selvaggi, 2004. "Exclusive Contracts Foster Relationship-Specific Investment," The Centre for Market and Public Organisation 04/105, Department of Economics, University of Bristol, UK.
  13. Price, Renee, 1999. "Voluntry earnings disclosures in Uniform franchise offering circulars," Journal of Accounting and Economics, Elsevier, vol. 28(3), pages 391-423, December.
  14. Josef Windsperger, 2002. "The Structure of Ownership Rights in Franchising: An Incomplete Contracting View," European Journal of Law and Economics, Springer, vol. 13(2), pages 129-142, March.

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