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Advertising Fee in Business-Format Franchising

Author

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  • Preyas S. Desai

    (Fuqua School of Business, Duke University, Durham, North Carolina 27708)

Abstract

Most franchisors charge an advertising fee in addition to the better known royalty and franchise fee. We study the role of the advertising fee in improving channel coordination. We begin our analysis with a simple case of one franchisor dealing with two identical franchisees and find that the advertising fee allows the franchisor to commit to a specific level of advertising spending at the time of contract acceptance. We also find that the lump-sum advertising fee is better than the sales-based advertising fee. These results are intriguing because most franchisors use the sales-based advertising fee. We show that when franchisees' markets differ in how advertising affects sales, the franchisor may prefer the sales-based advertising fee. There are two reasons for the higher profitability of the sales-based advertising fee. First, the sales-based advertising fee conditions the franchisor's advertising decision on the franchisees' price and service decisions, and induces them to make better price and service decisions. The second reason is that with heterogeneous franchisees, using the sales-based advertising fee does not increase the total sales-based component in the fee structure. These results also hold when the franchisor pledges to contribute a matching fraction of the advertising fee to the advertising fund.

Suggested Citation

  • Preyas S. Desai, 1997. "Advertising Fee in Business-Format Franchising," Management Science, INFORMS, vol. 43(10), pages 1401-1419, October.
  • Handle: RePEc:inm:ormnsc:v:43:y:1997:i:10:p:1401-1419
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    File URL: http://dx.doi.org/10.1287/mnsc.43.10.1401
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    Cited by:

    1. Øystein Foros & Hans Jarle Kind & Jan Yngve Sand, 2009. "Slotting Allowances and Manufacturers’ Retail Sales Effort," Southern Economic Journal, Southern Economic Association, vol. 76(1), pages 266-282, July.
    2. Yang, Jing & Xie, Jinxing & Deng, Xiaoxue & Xiong, Huachun, 2013. "Cooperative advertising in a distribution channel with fairness concerns," European Journal of Operational Research, Elsevier, vol. 227(2), pages 401-407.
    3. Greg Shaffer & Florian Zettelmeyer, 2004. "Advertising in a Distribution Channel," Marketing Science, INFORMS, vol. 23(4), pages 619-628, November.
    4. repec:ebl:ecbull:eb-17-00155 is not listed on IDEAS
    5. Tony Haitao Cui & Jagmohan S. Raju & Z. John Zhang, 2007. "Fairness and Channel Coordination," Management Science, INFORMS, vol. 53(8), pages 1303-1314, August.
    6. Niu, Baozhuang & Jin, Delong & Pu, Xujin, 2016. "Coordination of channel members’ efforts and utilities in contract farming operations," European Journal of Operational Research, Elsevier, vol. 255(3), pages 869-883.
    7. Gurnani, Haresh & Erkoc, Murat & Luo, Yadong, 2007. "Impact of product pricing and timing of investment decisions on supply chain co-opetition," European Journal of Operational Research, Elsevier, vol. 180(1), pages 228-248, July.
    8. Liu, Bin & Ma, Xindi & Zhang, Rong, 2014. "Joint decision on pricing and advertising for competing retailers under emergency purchasing," Economic Modelling, Elsevier, vol. 39(C), pages 257-264.
    9. Martín-Herrán, Guiomar & Sigué, Simon Pierre & Zaccour, Georges, 2011. "Strategic interactions in traditional franchise systems: Are franchisors always better off?," European Journal of Operational Research, Elsevier, vol. 213(3), pages 526-537, September.
    10. Piccolo, Salvatore & Gonzalez, Aldo & Martina, Riccardo, 2014. "Endogenous residual claimancy by vertical hierarchies," Economics Letters, Elsevier, vol. 122(3), pages 423-427.
    11. Preyas S. Desai & Anand Krishnamoorthy & Preethika Sainam, 2010. "“Call for Prices”: Strategic Implications of Raising Consumers' Costs," Marketing Science, INFORMS, vol. 29(1), pages 158-174, 01-02.
    12. Aust, Gerhard & Buscher, Udo, 2014. "Cooperative advertising models in supply chain management: A review," European Journal of Operational Research, Elsevier, vol. 234(1), pages 1-14.
    13. repec:ehu:cuader:24429 is not listed on IDEAS
    14. Shuya Yin & Saibal Ray & Haresh Gurnani & Animesh Animesh, 2010. "Durable Products with Multiple Used Goods Markets: Product Upgrade and Retail Pricing Implications," Marketing Science, INFORMS, vol. 29(3), pages 540-560, 05-06.
    15. Gérard P. Cachon & Martin A. Lariviere, 2005. "Supply Chain Coordination with Revenue-Sharing Contracts: Strengths and Limitations," Management Science, INFORMS, vol. 51(1), pages 30-44, January.
    16. repec:eee:jouret:v:84:y:2008:i:4:p:449-460 is not listed on IDEAS
    17. R. Venkatesh & Pradeep Chintagunta & Vijay Mahajan, 2006. "Research Note--Sole Entrant, Co-optor, or Component Supplier: Optimal End-Product Strategies for Manufacturers of Proprietary Component Brands," Management Science, INFORMS, vol. 52(4), pages 613-622, April.
    18. repec:eee:jouret:v:87:y:2011:i:3:p:269-284 is not listed on IDEAS
    19. repec:eee:jouret:v:86:y:2010:i:2:p:137-147 is not listed on IDEAS
    20. Kunter, Marcus, 2012. "Coordination via cost and revenue sharing in manufacturer–retailer channels," European Journal of Operational Research, Elsevier, vol. 216(2), pages 477-486.
    21. Tran, Thanh & Desiraju, Ramarao, 2017. "Group-buying and channel coordination under asymmetric information," European Journal of Operational Research, Elsevier, vol. 256(1), pages 68-75.
    22. Sigué, Simon Pierre & Chintagunta, Pradeep, 2009. "Advertising strategies in a franchise system," European Journal of Operational Research, Elsevier, vol. 198(2), pages 655-665, October.
    23. Desai Preyas S & Padmanabhan Paddy, 2004. "Durable Good, Extended Warranty and Channel Coordination," Review of Marketing Science, De Gruyter, vol. 2(1), pages 1-25, January.

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    Keywords

    channels of distribution; franchising;

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