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Information Structure and Contractual Choice in Franchising

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  • Debajyoti Chakrabarty
  • Ananish Chaudhuri
  • Chester Spell

Abstract

We develop a formal model to explain the existence of dual distribution in franchising by assuming variations in location profitability. We posit that location quality dictates the choice between franchising and company ownership. We analyze the contract choice problem when location quality is (1) private information for the franchisor; (2) private information for the franchisee, and (3) common knowledge. We show that (1) can result in the coexistence of company-owned and franchised stores. Under (2) all stores will be franchised. (3) can lead to only company-owned stores or only franchised outlets, depending on monitoring costs.

Suggested Citation

  • Debajyoti Chakrabarty & Ananish Chaudhuri & Chester Spell, 2002. "Information Structure and Contractual Choice in Franchising," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 158(4), pages 638-663, December.
    • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(200212)158:4_638:isacci_2.0.tx_2-s
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    References listed on IDEAS

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    1. Gallini, Nancy T & Lutz, Nancy A, 1992. "Dual Distribution and Royalty Fees in Franchising," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 8(3), pages 471-501, October.
    2. Chong‐En Bai & Zhigang Tao, 2000. "Contract Mixing in Franchising as a Mechanism for Public‐Good Provision," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(1), pages 85-113, March.
    3. William Hallagan, 1978. "Self-Selection by Contractual Choice and the Theory of Sharecropping," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 344-354, Autumn.
    4. Eswaran, Mukesh & Kotwal, Ashok, 1985. "A Theory of Contractual Structure in Agriculture," American Economic Review, American Economic Association, vol. 75(3), pages 352-367, June.
    5. 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.
    6. Sugato Bhattacharyya & Francine Lafontaine, 1995. "Double-Sided Moral Hazard and the Nature of Share Contracts," RAND Journal of Economics, The RAND Corporation, vol. 26(4), pages 761-781, Winter.
    7. repec:bla:econom:v:69:y:2002:i:275:p:445-59 is not listed on IDEAS
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    Cited by:

    1. Ackermann, Jeff, 2024. "The effects of franchising on stores, competitors, and consumers," International Journal of Industrial Organization, Elsevier, vol. 93(C).
    2. Kranz, Sebastian & Lewin-Solomons, Shira B., 2008. "Decision Structures in Franchise Systems of the Plural Form," Bonn Econ Discussion Papers 8/2008, University of Bonn, Bonn Graduate School of Economics (BGSE).

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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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