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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26267
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| Title: | The Benefits of Franchising and Vertical Disintergration in Monopolistic
Competition for Locationally Differentiated Products |
| Authors: | Economides, Nicholas |
| Keywords: | Franchising
Locational Differentiation
Vertical Disintegration |
| Issue Date: | Mar-1993 |
| Series/Report no.: | EC-93-09 |
| Abstract: | A model of franchising competition in locationally differentiated
products is constructed. A franchisor (upstream firm) collects a
marginal transfer fee per unit of output sold by a franchisee
(downstream firm). For example, the marginal transfer fee can be
realized as a markup on variable inputs supplied by the franchisor. A
franchisor also collects a lump-sum rent (commonly called
"franchising fee") from each franchisee. Acting in the first
stage, a franchisor can manipulate the degree of competition in the
downstream market through his choice of the marginal fee while keeping
the franchisee’s profits at zero through the lump sum rent.
Franchisees choose prices for the final goods in the second stage. It is
shown that, at the unique subgame-perfect equilibrium, the marginal fee
is above marginal cost. Compared to a regime of vertically integrated
firms, prices are higher, there are more numerous outlets when
contractual costs are small, and social surplus is lower in the
franchising regime. |
| URI: | http://hdl.handle.net/2451/26267 |
| Appears in Collections: | Economics Working Papers
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