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Price Control In Franchised Chains: The Case Of McDonald's Dollar Menu

Author

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  • Itai Ater

    (Department of Economics, Stanford University)

  • Oren Rigbi

    (Department of Economics, Stanford University)

Abstract

We present new evidence on the ability of chains to improve control over prices set in their franchised outlets. We construct and analyze panel data of fast food outlets from 1999 and 2006 to quantify price differences between franchised and corporate-owned outlets, and to test whether the introduction of low-priced items is an effective tool to control prices in franchised chains. Our main finding is that since 1999, McDonald's franchisees’ price premium over corporate-owned outlets has fallen by 70%, and that this drop has occurred only in items with good substitutes in the Dollar Menu, introduced by McDonald's in 2002. We also test how competition and repeat customers affect pricing in franchised and corporate-owned outlets. We find that whereas the existence of repeat customers affects prices, competition does not.

Suggested Citation

  • 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.
    • Handle: RePEc:sip:dpaper:06-022
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    Cited by:

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    More about this item

    Keywords

    Franchising; Fast food; Free riding; Vertical restraints;
    All these keywords.

    JEL classification:

    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts
    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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