Territorial Exclusivity in Franchisee Systems

Abstract

This article shows that the higher the problems of hold-up and free-riding in franchise systems, the higher the probability that the franchisor will provide franchisees with territorial exclusivity. It therefore appears that territorial exclusivity is an assurance from a franchisor that the return on the sunk investments of a franchisee will not be subsequently held-up. Moreover, it appears that territorial exclusivity alleviates free-riding problem by making the franchisees local monopolists for the brand in question, which increases the probability that they will receive most of the benefits generated by their service provision.

Keywords: Ffranchising, Hold-Up, Free-Riding Territorial Exclusivity

JEL Classification: L14, L22, L81