One empirical phenomenon that has received little attention in the franchising literature is the tendency for individual franchisees to own not just one but several units of a given franchised chain. Most current theories of franchising, based on incentives, information asymmetries, and strategic arguments, have little capacity to explain this phenomenon. In fact, several of them imply that all units should be independently owned and operated. However, given the existence of multi-unit owners, most of the theories have implications for the extent to which units owned by a single owner should be 1) geographically near each other, 2) located in areas where populations display similar demographic characteristics, and 3) contiguous to each other, that is, should share a market boundary. This paper provides empirical evidence that restaurants of individual owners in the six largest fast-food chains in Texas are geographically close to each other, that they are located in areas with similar demographic characteristics, and that they are contiguous. This evidence suggests among other things that franchising is not a strategic delegation device, and that the location of units is not determined by the franchisee's desire to diversify away risk. Instead, the minimization of monitoring or free-riding costs, and the franchisor's reliance on the franchisee's local market expertise, appear to be central concerns in the allocation of units across franchisees.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
5859.
Length: Date of creation: Dec 1996 Date of revision: Handle: RePEc:nbr:nberwo:5859
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Find related papers by JEL classification: L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior L8 - Industrial Organization - - Industry Studies: Services
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Kenneth L. Judd, 1983.
"Credible Spatial Preemption,"
Discussion Papers
577, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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