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Dual Distribution in Franchising

In this paper we offer an explanation for the practice of dual distribution. the simultaneous use of franchises and company owned outlets for distributing new products. Our explanation rests on the observation that franchisors often acquire private information, not available to franchisees, on product demand through marketing efforts. Under this assumption of asymmetric information, we show that a franchisor will use both direct ownership as well as the franchise contract to convey information about a new product. This explanation for dual distribution relies neither on capital market imperfections nor upon location-specific factors, in contrast to alternative explanations advanced in the literature Testable implications of the signaling model are discussed.

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File URL: http://cowles.econ.yale.edu/P/cd/d09b/d0973.pdf
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Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 973.

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Length: 33 pages
Date of creation: Mar 1991
Date of revision:
Handle: RePEc:cwl:cwldpp:973
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Web page: http://cowles.econ.yale.edu/
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Order Information: Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

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  1. Oliver Hart & Sanford Grossman, 1985. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Working papers 372, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. 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.
  3. Milgrom, Paul & Roberts, John, 1986. "Price and Advertising Signals of Product Quality," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 796-821, August.
  4. Leland, Hayne E & Pyle, David H, 1977. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Journal of Finance, American Finance Association, vol. 32(2), pages 371-87, May.
  5. 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 503-26, October.
  6. Lafontaine, F., 1990. "An Empirical Look At Franchise Contracts As Signaling Devices," GSIA Working Papers 1990-19, Carnegie Mellon University, Tepper School of Business.
  7. Lafontaine, F., 1988. "Contract Theory And Franchising: Some Empirical Results," GSIA Working Papers 88-89-33, Carnegie Mellon University, Tepper School of Business.
  8. 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.
  9. Martin, Robert E, 1988. "Franchising and Risk Management," American Economic Review, American Economic Association, vol. 78(5), pages 954-68, December.
  10. Nancy A. Lutz, 1989. "Warranties as Signals under Consumer Moral Hazard," RAND Journal of Economics, The RAND Corporation, vol. 20(2), pages 239-255, Summer.
  11. 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 223-33, April.
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