IDEAS home Printed from
   My bibliography  Save this article

Advertising Fee in Business-Format Franchising


  • Preyas S. Desai

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


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

    Download full text from publisher

    File URL:
    Download Restriction: no


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    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. Dmitri Kuksov & Ron Shachar & Kangkang Wang, 2013. "Advertising and Consumers' Communications," Marketing Science, INFORMS, vol. 32(2), pages 294-309, March.
    13. 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.
    14. repec:ehu:cuader:24429 is not listed on IDEAS
    15. 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.
    16. 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.
    17. repec:eee:jouret:v:84:y:2008:i:4:p:449-460 is not listed on IDEAS
    18. 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.
    19. repec:eee:jouret:v:87:y:2011:i:3:p:269-284 is not listed on IDEAS
    20. repec:eee:jouret:v:86:y:2010:i:2:p:137-147 is not listed on IDEAS
    21. 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.
    22. 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.
    23. 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.
    24. 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.

    More about this item


    channels of distribution; franchising;


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:43:y:1997:i:10:p:1401-1419. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.