The Production Franchise: An Unstable Organizational Choice
In this paper some determinants of discrete shifts from production franchise agreements to vertical integration are investigated from a new angle. Production franxhise agreements are considered as an organizational innovation for the diffusion of process and/or product innovations. A common agency model describes production franchising as a contractual device between agent (the production franchisor) ans multiple principals (the production franchisees) that operate on an exclusive segment of a given territory. The boundaries of the franchisenetwork are obtained as a non-cooperative solution. Sufficient conditions are obtained for the profitability of franchising production and or the reduction of the degree of appropriability of innovation benefits by industrial franchisors. This offers a new theoretical explanation for observed business practices.
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