Competitive Franchising

30 Pages Posted: 30 Jun 2008

See all articles by Brett Graham

Brett Graham

Wang Yanan institute for Studies in Economics; University of Illinois at Urbana-Champaign - Department of Economics

Dan Bernhardt

University of Illinois at Urbana-Champaign - Department of Economics

Date Written: June 26, 2008

Abstract

We develop a tractable spatial model of oligopolistic competition in which firms endogenously determine both franchise/product locations and prices. Remarkably, when firms only differ along the endogenous spatial dimension, they earn zero profits: while ex-post consumer heterogeneity ensures positive gross profits, competition for market share results in socially excessive product lines and zero net profits. We then introduce exogenous taste heterogeneity, so that consumers also differ in their ex-ante preferences over product lines. We find that price competition due to the endogenous spatial dimension drives profits below what they would be with only taste heterogeneity.

Keywords: spatial competition, multi-product oligopoly, endogenous heterogeneity

JEL Classification: L11, L13

Suggested Citation

Graham, Brett and Bernhardt, Dan, Competitive Franchising (June 26, 2008). Available at SSRN: https://ssrn.com/abstract=1151937 or http://dx.doi.org/10.2139/ssrn.1151937

Brett Graham

Wang Yanan institute for Studies in Economics ( email )

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University of Illinois at Urbana-Champaign - Department of Economics ( email )

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Dan Bernhardt (Contact Author)

University of Illinois at Urbana-Champaign - Department of Economics ( email )

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