Specific Investments in Franchisor-Franchisee Relationships: A Model

Kacker, Manish and Ruhai Wu (2013), "Specific Investments in Franchisor-Franchisee Relationships: A Model," Journal of Marketing Channels, Forthcoming

30 Pages Posted: 4 Feb 2013

See all articles by Manish Kacker

Manish Kacker

McMaster University - Michael G. DeGroote School of Business

Ruhai Wu

McMaster University - Michael G. DeGroote School of Business

Date Written: January 1, 2013

Abstract

Transaction cost theory has largely considered specific investments as exogenous, leading to calls for studying them as endogenous decisions. We examine firms’ specific investment decisions through a game-theoretic model of bilateral, sequential decisions in an extant franchisor-franchisee relationship with information asymmetry. Our model shows specific investments can directly increase channel revenues and function as tools to credibly communicate demand information. Specifically, under certain conditions, it is optimal for a franchisor to make a specific investment even when it is not reciprocated by the franchisee. Here, the investment does not directly increase exchange value but only acts as a money-burning signal.

Suggested Citation

Kacker, Manish and Wu, Ruhai, Specific Investments in Franchisor-Franchisee Relationships: A Model (January 1, 2013). Kacker, Manish and Ruhai Wu (2013), "Specific Investments in Franchisor-Franchisee Relationships: A Model," Journal of Marketing Channels, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2211612

Manish Kacker (Contact Author)

McMaster University - Michael G. DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

Ruhai Wu

McMaster University - Michael G. DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

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