The Economics Of Franchising

by Roger D. Blair , Francine Lafontaine

• ISBN13: 9780521772525
• ISBN10: 0521772524
• Format: Hardcover
• Copyright: 2005-04-11
• Publisher: Cambridge University Press

Summary

This book describes in much detail both how and why franchising works. It also analyses the economic tensions that contribute to conflict in the franchisor-franchisee relationship. The treatment includes a great deal of empirical evidence on franchising, its importance in various segments of the economy, the terms of franchise contracts, and what we know about how all these have evolved over time, especially in the US market. A good many myths are dispelled in the process. The economic analysis of the franchisor-franchisee relationship begins with the observation that for franchisors, franchising is a contractual alternative to vertical integration. Subsequently, the tensions that arise between a franchisor and its franchisees, who in fact are owners of independent businesses, are examined in turn. In particular the authors discuss issues related to product quality control, tying arrangements, pricing, location and territories, advertising, and termination and renewals.

Author Biography

Roger D. Blair is Huber Hurst Professor and Chair in the Department of Economics at the University of Florida. The books he has coauthored include Antitrust Economics, Law and Economics of Vertical Integration and Control, Monopsony: Antitrust Law and Economics, and two titles from Cambridge University Press: Intellectual Property: Economics and Legal Dimensions of Rights and Remedies with Thomas F. Cotter and Monopsony in Law and Economics with Jeffrey L. Harrison. Francine Lafontaine is Professor of Business Economics and Public Policy at the Stephen M. Ross School of Business at the University of Michigan. She is widely recognized as a world expert on the subject of franchising and, as such, has acted as consultant to various companies and the Federal Trade Commission.

Table of Contents

Preface	xi
Introduction	1	(19)
What Is a Franchise?	3	(2)
Traditional and Business-Format Franchising	5	(3)
In Which Industries Do We Find Franchising?	8	(10)
Plan of Study	18	(2)
Four Popular Misconceptions about Franchising	20	(34)
Growth: Fact and Fancy	21	(13)
Entry and Exit	34	(12)
The Size Distribution of Franchised Chains	46	(3)
Multi-Unit Franchisees	49	(3)
Conclusion	52	(2)
Franchise Contracts	54	(28)
Introduction	54	(2)
Franchise Fees	56	(6)
Royalty Rates	62	(7)
Advertising Fees	69	(9)
Non-Monetary Contract Clauses	78	(1)
Some Final Thoughts and Comments	79	(3)
Franchising, Vertical Integration, and Vertical Restraints	82	(35)
Introduction	82	(1)
Dual Distribution or Partial Vertical Integration in Franchising	83	(11)
Contractual Equivalents	94	(13)
Incentive Issues and Agency Theory	107	(9)
Conclusion	116	(1)
Quality Control	117	(22)
Introduction	117	(4)
A Simple Model of Vertical Externalities	121	(4)
Contractual Efforts to Resolve Incentive Problems	125	(8)
Costs of Control	133	(2)
Observed Quality Differentials between Company and Franchised Units	135	(2)
Conclusion	137	(2)
Franchise Tying Contracts	139	(35)
Introduction	139	(3)
Antitrust Treatment of Tying Contracts in General	142	(2)
Application to Franchise Tying Contracts	144	(6)
The Kodak Decision and Its Progeny	150	(2)
Franchise Tying Cases After Kodak	152	(4)
Identifying Market Power After Kodak	156	(8)
Post-Contractual Opportunism	164	(2)
Evaluating Franchise Opportunities	166	(2)
Conclusion	168	(1)
Appendix: Vertical Integration and Tying Contracts	168	(6)
Vertical Price Controls in Franchising	174	(28)
Introduction	174	(3)
The Legal History of Maximum Resale Price Fixing in the United States	177	(5)
An Economic Analysis of Maximum Resale Price Restraints	182	(14)
The Public Policy Implications of Khan	196	(1)
Conclusion	197	(1)
Appendix: Sales-Based Royalties and Demand Externalities	198	(4)
Encroachment	202	(34)
Introduction	202	(2)
Market Coverage and ``Traditional'' Encroachment	204	(18)
Industry Responses	222	(9)
Non-Traditional Encroachment	231	(2)
Conclusion	233	(1)
Appendix: Carvel Corporation's Contract: Before and After	234	(2)
Advertising and Promotion	236	(22)
Introduction	236	(1)
A Simple Model of Advertising as Information	237	(7)
The Effect of Scale Economies	244	(2)
Advertising as a Public Good in Franchised Chains	246	(4)
Advertising in Franchised Chains in Practice	250	(3)
Franchisor--Franchisee Conflict	253	(4)
Conclusion	257	(1)
Termination and Non-Renewal	258	(33)
Introduction	258	(1)
Franchise Contract Duration, Termination, and Renewal: A Look at the Data	259	(5)
The Role of Duration, Termination, and Non-Renewal in Theory	264	(11)
Termination and Non-Renewal: Legal Considerations	275	(5)
Assessing Damages for Wrongful Termination	280	(10)
Conclusion	290	(1)
Concluding Remarks	291	(12)
Introduction	291	(2)
A Summary	293	(4)
International Franchising	297	(1)
The Future	298	(2)
Conclusion	300	(3)
Articles, Books, and Other Publications	303	(18)
Cases, Codes, and Statutes	321	(4)
Index	325