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A stochastic dynamic programming model for valuing exclusivity from encroachment in franchising

Author

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  • S Tikoo

    (State University of New York at New Paltz, New York, USA)

  • S Liu

    (State University of New York at New Paltz, New York, USA)

  • S K Nair

    (University of Connecticut, Storrs, Connecticut, USA)

Abstract

Valuing territorial exclusivity in franchising is difficult because of the uncertainty associated with variables such as future franchise sales and brand strength. We present a stochastic dynamic programming model to value the exclusivity option from the perspective of both the franchisor and the franchisee. When there is positive value to the franchisor of including the exclusivity option in the contract, and to the franchisee of purchasing this option, the likelihood of franchisor-franchisee encroachment-related conflict is reduced. We also discuss structural results and explain our results using a numerical example.

Suggested Citation

  • S Tikoo & S Liu & S K Nair, 2012. "A stochastic dynamic programming model for valuing exclusivity from encroachment in franchising," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 63(2), pages 151-159, February.
    • Handle: RePEc:pal:jorsoc:v:63:y:2012:i:2:p:151-159
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