Information Structure and Contractual Choice in Franchising
We develop a formal model to explain the existence of dual distribution in franchising by assuming variations in location profitability. We posit that location quality dictates the choice between franchising and company ownership. We analyze the contract choice problem when location quality is (1) private information for the franchisor; (2) private information for the franchisee, and (3) common knowledge. We show that (1) can result in the coexistence of company-owned and franchised stores. Under (2) all stores will be franchised. (3) can lead to only company-owned stores or only franchised outlets, depending on monitoring costs.
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Volume (Year): 158 (2002)
Issue (Month): 4 (December)
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References listed on IDEAS
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- Brickley, James A. & Dark, Frederick H., 1987. "The choice of organizational form The case of franchising," Journal of Financial Economics, Elsevier, vol. 18(2), pages 401-420, June.
- Sugato Bhattacharyya & Francine Lafontaine, 1995. "Double-Sided Moral Hazard and the Nature of Share Contracts," RAND Journal of Economics, The RAND Corporation, vol. 26(4), pages 761-781, Winter.
- Eswaran, Mukesh & Kotwal, Ashok, 1985. "A Theory of Contractual Structure in Agriculture," American Economic Review, American Economic Association, vol. 75(3), pages 352-367, June.
- Gallini, Nancy T & Lutz, Nancy A, 1992. "Dual Distribution and Royalty Fees in Franchising," Journal of Law, Economics, and Organization, Oxford University Press, vol. 8(3), pages 471-501, October.
- Chaudhuri, Ananish & Maitra, Pushkar, 2002. "On the Choice of Tenancy Contracts in Rural India," Economica, London School of Economics and Political Science, vol. 69(275), pages 445-459, August.
- Chong-En Bai & Zhigang Tao, 2000. "Contract Mixing in Franchising as a Mechanism for Public-Good Provision," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(1), pages 85-113, March.
- William Hallagan, 1978. "Self-Selection by Contractual Choice and the Theory of Sharecropping," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 344-354, Autumn.
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