Information structure and contractual choice in franchising

Debajyoti Chakrabarty, Ananish Chaudhuri, Chester Spell

Research output: Contribution to journalArticle

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. (JEL: D 82, D 23, L 14).

Original languageEnglish
Pages (from-to)638-663
Number of pages26
JournalJournal of Institutional and Theoretical Economics
Volume158
Issue number4
Publication statusPublished - 1 Dec 2002
Externally publishedYes

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