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Territorial Restrictions in Franchise Contracts

Author

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  • Mathewson, Frank
  • Winter, Ralph

Abstract

Efficient contracts set incentives through the assignment of rights and profit shares. Although efficient contracts have been used to explain the nature of the firm, the use of contractual rights in specific business contracts is relatively unexplored. The authors analyze contractual rights in franchise systems, in particular the right to add franchisees. An exclusive territory assigned to an initial franchisee is not an immutable guarantee but rather a starting point for subsequent renegotiation in the franchise relationship. Exclusivity is, therefore, profitable when franchisee efforts are critical to the venture. A sample of franchise contracts reveals evidence consistent with the model's prediction. Copyright 1994 by Oxford University Press.

Suggested Citation

  • Mathewson, Frank & Winter, Ralph, 1994. "Territorial Restrictions in Franchise Contracts," Economic Inquiry, Western Economic Association International, vol. 32(2), pages 181-192, April.
    • Handle: RePEc:oup:ecinqu:v:32:y:1994:i:2:p:181-92
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    Cited by:

    1. Xiao, Junji & Ju, Heng, 2016. "The determinants of dealership structure: Empirical analysis of the Chinese auto market," Journal of Comparative Economics, Elsevier, vol. 44(4), pages 961-981.
    2. Olivier Cochet & Thomas Ehrmann, 2007. "Preliminary evidence on the appointment of institutional solutions to franchisor moral hazard-the case of franchisee councils," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(1), pages 41-55.
    3. Salvatore Piccolo & Markus Reisinger, 2011. "Exclusive Territories and Manufacturers' Collusion," Management Science, INFORMS, vol. 57(7), pages 1250-1266, July.
    4. Ishikawa, Toshiharu & Toda, Masao, 2005. "Retail market structure and the threat by the manufacturer to sell goods directly to the consumer," Socio-Economic Planning Sciences, Elsevier, vol. 39(1), pages 43-55, March.
    5. David de Meza & Mariano Selvaggi, 2004. "Exclusive Contracts Foster Relationship-Specific Investment," The Centre for Market and Public Organisation 04/105, The Centre for Market and Public Organisation, University of Bristol, UK.
    6. Gallini, Nancy T. & Hollis, Aidan, 1999. "A contractual approach to the gray market," International Review of Law and Economics, Elsevier, vol. 19(1), pages 1-21, March.
    7. David Meza & Mariano Selvaggi, 2007. "Exclusive contracts foster relationship-specific investment," RAND Journal of Economics, RAND Corporation, vol. 38(1), pages 85-97, March.
    8. Pierre Azoulay & Scott Shane, 2001. "Entrepreneurs, Contracts, and the Failure of Young Firms," Management Science, INFORMS, vol. 47(3), pages 337-358, March.
    9. Haucap, Justus & Klein, Gordon J., 2012. "Einschränkungen der Preisgestaltung im Einzelhandel aus wettbewerbsökonomischer Perspektive," DICE Ordnungspolitische Perspektiven 22, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    10. Josef Windsperger, 2002. "The Structure of Ownership Rights in Franchising: An Incomplete Contracting View," European Journal of Law and Economics, Springer, vol. 13(2), pages 129-142, March.
    11. Price, Renee, 1999. "Voluntry earnings disclosures in Uniform franchise offering circulars," Journal of Accounting and Economics, Elsevier, vol. 28(3), pages 391-423, December.
    12. Lutz, Nancy A., 1995. "Ownership rights and incentives in franchising," Journal of Corporate Finance, Elsevier, vol. 2(1-2), pages 103-131, October.
    13. Hendrikse, George & Jiang, Tao, 2011. "An Incomplete Contracting Model of Dual Distribution in Franchising," Journal of Retailing, Elsevier, vol. 87(3), pages 332-344.
    14. Hendrikse, G.W.J. & Jiang, T., 2005. "Plural Form in Franchising: An Incomplete Contracting Approach," ERIM Report Series Research in Management ERS-2005-090-ORG, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    15. Jansen, Jos, 2003. "Coexistence of strategic vertical separation and integration," International Journal of Industrial Organization, Elsevier, vol. 21(5), pages 699-716, May.
    16. Burgdorf, Jacob, 2019. "Impact of mandated exclusive territories in the US brewing industry: Evidence from scanner level data," International Journal of Industrial Organization, Elsevier, vol. 63(C), pages 376-416.
    17. Vanesa Solis-Rodriguez & Manuel Gonzalez-Diaz, 2016. "Provisions to Be Negotiated in Franchise Contracts: The Case of Spanish Chains," Journal of Business Administration Research, Journal of Business Administration Research, Sciedu Press, vol. 5(2), pages 66-82, October.
    18. Wei Lin & Frank Mathewson & Junji Xiao, 2024. "Screening Through Investment: Evidence from the Chinese Automobile Industry," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 64(4), pages 471-513, June.
    19. Alicia García-Herrera & Rafael Llorca-Vivero, 2010. "How time influences franchise contracts: the Spanish case," European Journal of Law and Economics, Springer, vol. 30(1), pages 1-16, August.
    20. Hendrikse, G.W.J. & Jiang, T., 2007. "An Incomplete Contracting Model of Governance Structure Variety in Franchising," ERIM Report Series Research in Management ERS-2007-049-ORG, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    21. Chih‐Ning Chu & Wai‐Man Liu, 2010. "General Equilibrium Analysis Of Hold‐Up Problem And Non‐Exclusive Franchise Contract," Pacific Economic Review, Wiley Blackwell, vol. 15(5), pages 674-684, December.
    22. Haucap, Justus & Heimeshoff, Ulrich & Klein, Gordon J. & Rickert, Dennis & Wey, Christian, 2013. "Wettbewerbsprobleme im Lebensmitteleinzelhandel," DICE Ordnungspolitische Perspektiven 48, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    23. Stanworth, John & Curran, James, 1999. "Colas, burgers, shakes, and shirkers: Towards a sociological model of franchising in the market economy," Journal of Business Venturing, Elsevier, vol. 14(4), pages 323-344, July.
    24. Spencer Elizabeth Crawford, 2015. "Revising the Role of Contract in Development Cooperation," The Law and Development Review, De Gruyter, vol. 8(1), pages 147-186, June.

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