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Royalty Rate Structure in Case of Franchising

Author

Listed:
  • Ivan Kotliarov

    (Cand. Sc. in Economics, Associate Professor, Chair Of International Finance and Financial Markets, Faculty of Economics, National Research Uniersity Higher School of Economics)

Abstract

The present article contains an analysis of differences between licensing and franchising. It is demonstrated that models of royalty rate calculation developed for licensing should not be applied to franchising as benefits received by licensee and franchisee are different. It is proposed to include in the model of royalty calculation the risk reduction generated by franchisor¡¯s effective technologies and managerial support that are given to franchisee. It is demonstrated that franchisee may wish to acquire the franchise even if franchisor takes the full amount of additional income or if this additional income is negative.

Suggested Citation

  • Ivan Kotliarov, 2011. "Royalty Rate Structure in Case of Franchising," Annals of Economics and Finance, Society for AEF, vol. 12(1), pages 139-156, May.
  • Handle: RePEc:cuf:journl:y:2011:v:12:i:1:p:139-156
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    References listed on IDEAS

    as
    1. Francine Lafontaine & Kathryn L. Shaw, 1999. "The Dynamics of Franchise Contracting: Evidence from Panel Data," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 1041-1080, October.
    2. Martin, Robert E, 1988. "Franchising and Risk Management," American Economic Review, American Economic Association, vol. 78(5), pages 954-968, December.
    3. Francine Lafontaine, 1992. "Agency Theory and Franchising: Some Empirical Results," RAND Journal of Economics, The RAND Corporation, vol. 23(2), pages 263-283, Summer.
    4. Lafontaine, Francine, 1993. "Contractual Arrangements as Signaling Devices: Evidence from Franchising," Journal of Law, Economics, and Organization, Oxford University Press, vol. 9(2), pages 256-289, October.
    5. James A. Brickley, 2002. "Royalty Rates and Upfront Fees in Share Contracts: Evidence from Franchising," Journal of Law, Economics, and Organization, Oxford University Press, vol. 18(2), pages 511-535, October.
    6. Norton, Seth W, 1988. "An Empirical Look at Franchising as an Organizational Form," The Journal of Business, University of Chicago Press, vol. 61(2), pages 197-218, April.
    7. Rubin, Paul H, 1978. "The Theory of the Firm and the Structure of the Franchise Contract," Journal of Law and Economics, University of Chicago Press, vol. 21(1), pages 223-233, April.
    8. Kaufmann, Patrick J & Lafontaine, Francine, 1994. "Costs of Control: The," Journal of Law and Economics, University of Chicago Press, vol. 37(2), pages 417-453, October.
    9. Rao, Ram C & Srinivasan, Shubashri, 1995. "Why Are Royalty Rates Higher in Service-Type Franchises?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(1), pages 7-31, Spring.
    10. Blair,Roger D. & Lafontaine,Francine, 2011. "The Economics of Franchising," Cambridge Books, Cambridge University Press, number 9780521775892.
    11. Luis Vázquez, 2005. "Up-front Franchise Fees and Ongoing Variable Payments as Substitutes: An Agency Perspective," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 26(4), pages 445-460, June.
    12. Mathewson, G Frank & Winter, Ralph A, 1985. "The Economics of Franchise Contracts," Journal of Law and Economics, University of Chicago Press, vol. 28(3), pages 503-526, October.
    13. Steven C. Michael, 2009. "Entrepreneurial signaling to attract resources: the case of franchising," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 30(6), pages 405-422.
    14. Thierry Pénard & E. Raynaud & S. Saussier, 2003. "Dual distribution and royalty rates in franchised chains : an empirical exploration using French data," Post-Print halshs-00069582, HAL.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Royalty; Royalty rate; Franchising; Franchisee; Franchisor; Risk; Income;

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures

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