The Benefits of Franchising and Vertical Disintergration in Monopolistic Competition for Locationally Differentiated Products

28 Pages Posted: 3 Nov 2008

See all articles by Nicholas Economides

Nicholas Economides

New York University - Leonard N. Stern School of Business - Department of Economics

Date Written: March 1993

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 ofvertically integrated firms, prices are higher, there are more numerous outlets when contractual costs are small, and social surplus is lower in the franchising regime.

Keywords: Franchising, Locational Differentiation, Vertical Disintegration

Suggested Citation

Economides, Nicholas, The Benefits of Franchising and Vertical Disintergration in Monopolistic Competition for Locationally Differentiated Products (March 1993). NYU Working Paper No. EC-93-09, Available at SSRN: https://ssrn.com/abstract=1293119

Nicholas Economides (Contact Author)

New York University - Leonard N. Stern School of Business - Department of Economics ( email )

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