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Pricing Decisions in Franchised Chains: A Look at the Restaurant and Fast-Food Industry

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  • Francine Lafontaine

Abstract

This paper examines empirical issues of pricing and price dispersion within franchised restaurant and fast-food chains. Given the per se illegality of resale price maintenance (RPM) under current U.S. Antitrust laws, and the fact that franchised outlets are independent businesses under the law, franchisors must delegate the power to set prices to franchisees whereas corporate chains can control downstream prices directly. The issue I examine is whether it matters empirically who, between the franchisor or the franchisee, gets to choose downstream prices, and why. After discussing a number of reasons why prices chosen by franchisees may differ from those that a franchisor would pick, I show, using data from all restaurant chains in the metropolitan Pittsburgh and Detroit areas, that there is price dispersion in fast-food franchising. I then show that the amount of price dispersion relates to the amount of franchising in a way that suggests that 1) franchisors are not able to control franchisees' prices indirectly to the same extent that they control company-owned unit prices and 2) the prices in franchised and corporate units are systematically different. Finally, I show that prices are systematically lower in corporate restaurants. This suggests that the reason behind the price differentials is not franchisor opportunism, but more likely double marginalization or, potentially, the existence of positive horizontal externalities among restaurants in a chain.

Suggested Citation

  • Francine Lafontaine, 1995. "Pricing Decisions in Franchised Chains: A Look at the Restaurant and Fast-Food Industry," NBER Working Papers 5247, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:5247
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    Cited by:

    1. Etienne Pfister & Bruno Deffains & Myriam Doriat-Duban & Stéphane Saussier, 2006. "Institutions and contracts: Franchising," European Journal of Law and Economics, Springer, vol. 21(1), pages 53-78, January.
    2. Meiseberg, Brinja & Perrigot, Rozenn, 2020. "Pricing-based practices, conflicts and performance in franchising," European Management Journal, Elsevier, vol. 38(6), pages 939-955.
    3. Arturs Kalnins, 2006. "Markets: The U.S. Lodging Industry," Journal of Economic Perspectives, American Economic Association, vol. 20(4), pages 203-218, Fall.
    4. Philip G. Gayle & Zijun Luo, 2015. "Choosing between Order-of-Entry Assumptions in Empirical Entry Models: Evidence from Competition between Burger King and McDonald's Restaurant Outlets," Journal of Industrial Economics, Wiley Blackwell, vol. 63(1), pages 129-151, March.
    5. Tongil “TI”Kim, 2021. "When Franchisee Service Affects Demand: An Application to the Car Radiator Market and Resale Price Maintenance," Marketing Science, INFORMS, vol. 40(1), pages 101-121, January.
    6. Gonzalez-Diaz, Manuel & Solis-Rodriguez, Vanesa, 2012. "Why do entrepreneurs use franchising as a financial tool? An agency explanation," Journal of Business Venturing, Elsevier, vol. 27(3), pages 325-341.
    7. Francine Lafontaine & Margaret E. Slade, 1998. "Incentive Contracting and the Franchise Decision," NBER Working Papers 6544, National Bureau of Economic Research, Inc.
    8. Jindal, Rupinder, 2011. "Reducing the Size of Internal Hierarchy: The Case of Multi-Unit Franchising," Journal of Retailing, Elsevier, vol. 87(4), pages 549-562.
    9. Leschewski, Andrea Marie & Weatherspoon, Dave D., 2014. "Fast Food Restaurant Pricing Strategies in Michigan Food Deserts," International Food and Agribusiness Management Review, International Food and Agribusiness Management Association, vol. 17(A), pages 1-24, March.
    10. Arturs Kalnins & Francine Lafontaine, 1996. "The Characteristics of Multi-Unit Ownership in Franchising: Evidence from Fast-Food Restaurants in Texas," NBER Working Papers 5859, National Bureau of Economic Research, Inc.
    11. Odile CHANUT & Nadjoua GHARBI & Dominique BONET FERNANDEZ, 2014. "Heterogeneous Institutional environments and Franchise networks Development in Maghreb," Working Papers 2014-171, Department of Research, Ipag Business School.
    12. Arturs Kalnins, 2017. "Pricing Variation Within Dual-Distribution Chains: The Different Implications of Externalities and Signaling for High- and Low-Quality Brands," Management Science, INFORMS, vol. 63(1), pages 139-152, January.
    13. repec:ipg:wpaper:2013-039 is not listed on IDEAS
    14. Affuso, L., 2000. "Intra-Firm Retail Contracting: Survey Evidence from the UK'," Cambridge Working Papers in Economics 0022, Faculty of Economics, University of Cambridge.
    15. Zenger, Hans, 2009. "Successive Monopolies with Endogenous Quality," MPRA Paper 15659, University Library of Munich, Germany.
    16. repec:ipg:wpaper:39 is not listed on IDEAS
    17. Hayden Stewart & David E. Davis, 2005. "Price Dispersion and Accessibility: A Case Study of Fast Food," Southern Economic Journal, John Wiley & Sons, vol. 71(4), pages 784-799, April.
    18. Cosman, Jacob & Schiff, Nathan, 2019. "Delivery in the city: evidence on monopolistic competition from New York restaurants," MPRA Paper 96617, University Library of Munich, Germany.
    19. Luisa Affuso, 2002. "An empirical study on contractual heterogeneity within the firm: the 'vertical integration-franchise contracts' mix," Applied Economics, Taylor & Francis Journals, vol. 34(8), pages 931-944.
    20. Emek Basker & Muhammad Taimur Khan, 2016. "Does the Minimum Wage Bite into Fast-Food Prices?," Journal of Labor Research, Springer, vol. 37(2), pages 129-148, June.
    21. Odile CHANUT & Nadjoua GHARBI & Dominique BONET FERNANDEZ, 2014. "Institutional Environments and the internationalization of franchise chains: the contrasting cases of North African countries," Working Papers 2014-200, Department of Research, Ipag Business School.
    22. Michael, Steven C., 2000. "The effect of organizational form on quality: the case of franchising," Journal of Economic Behavior & Organization, Elsevier, vol. 43(3), pages 295-318, November.
    23. Odile Chanut & Nadjoua Gharbi & Dominique Bonet Fernandez & Muhammad Shahbaz & E. Hachemi Aliouche, 2013. "Institutional Environments and the Internationalization of Franchise Chains: The Contrasting Cases of Three North African Countries," Working Papers 2013-39, Department of Research, Ipag Business School.
    24. Itai Ater & Oren Rigbi, 2007. "Price Control In Franchised Chains: The Case Of McDonald's Dollar Menu," Discussion Papers 06-022, Stanford Institute for Economic Policy Research.
    25. Lafontaine, Francine & Slade, Margaret E., 1996. "Retail contracting and costly monitoring: Theory and evidence," European Economic Review, Elsevier, vol. 40(3-5), pages 923-932, April.

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    More about this item

    JEL classification:

    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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