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General Equilibrium Analysis Of Hold‐Up Problem And Non‐Exclusive Franchise Contract

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  • Chih‐Ning Chu
  • Wai‐Man Liu

Abstract

In this paper, we develop a general equilibrium model that examines the emergence of non-exclusive franchise contracts in the presence of the franchisor hold‐up problem. Our model of an endogenous franchising network underscores the trade‐off between the cost associated with specifying and enforcing the contractual terms and the cost associated with broadening the relationships with multiple franchisors. We show that when the contracting cost relative to the relational cost is high and when the economies of specialization is low, a non‐exclusive franchise contract is an optimal contractual arrangement to mitigate franchisor opportunism.

Suggested Citation

  • Chih‐Ning Chu & Wai‐Man Liu, 2010. "General Equilibrium Analysis Of Hold‐Up Problem And Non‐Exclusive Franchise Contract," Pacific Economic Review, Wiley Blackwell, vol. 15(5), pages 674-684, December.
    • Handle: RePEc:bla:pacecr:v:15:y:2010:i:5:p:674-684
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    File URL: http://hdl.handle.net/10.1111/j.1468-0106.2010.00523.x
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    1. Mathewson, Frank & Winter, Ralph, 1994. "Territorial Restrictions in Franchise Contracts," Economic Inquiry, Western Economic Association International, vol. 32(2), pages 181-192, April.
    2. Brickley, James A & Misra, Sanjog & Van Horn, R Lawrence, 2006. "Contract Duration: Evidence from Franchising," Journal of Law and Economics, University of Chicago Press, vol. 49(1), pages 173-196, April.
    3. Vazquez, Luis, 2007. "Determinants of contract length in franchise contracts," Economics Letters, Elsevier, vol. 97(2), pages 145-150, November.
    4. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics, University of Chicago Press, vol. 21(2), pages 297-326, October.
    5. Brickley, James A & Dark, Frederick H & Weisbach, Michael S, 1991. "The Economic Effects of Franchise Termination Laws," Journal of Law and Economics, University of Chicago Press, vol. 34(1), pages 101-132, April.
    6. Williamson, Oliver E, 1983. "Credible Commitments: Using Hostages to Support Exchange," American Economic Review, American Economic Association, vol. 73(4), pages 519-540, September.
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