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Divisionalization, Franchising, or Mixing: A Market Competition Perspective

Author

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  • Chi-Chih Lin

    (Department of Economics, Fo Guang University, Taiwan)

Abstract

This paper considers strategic delegation for analyzing the optimal retail-organizational form for a firm. Our results indicate that expansion by a mix of divisions and franchises is possible, provided that there exists hierarchical conflict, the market is medium-sized, and the products are imperfect substitutes. The sales maximization for divisionalization plays an important role in the choice of retail-organizational form. This stems from the fact that the equilibrium outcome of profit delegation is more competitive than that of market share delegation, which itself is more competitive than that of sales delegation, where firms rely on expansion by a mix of divisions and franchises. Consequently, firms do not franchise to avoid a cost disadvantage, provided that top managers are guided by profit maximization. When the objective of each top manager is market share maximization, all top managers expect their rivals will retaliate, and this reduces the temptation to be aggressive in the first place. Accordingly, firms do not divisionalize to relax interbrand competition.

Suggested Citation

  • Chi-Chih Lin, 2010. "Divisionalization, Franchising, or Mixing: A Market Competition Perspective," Journal of Economics and Management, College of Business, Feng Chia University, Taiwan, vol. 6(2), pages 157-174, July.
    • Handle: RePEc:jec:journl:v:6:y:2010:i:2:p:157-174
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    More about this item

    Keywords

    divisionalization; franchising; market sale; product differentiation;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General

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