The Economic Advantages of Chain Organization

Abstract

This article considers the rapid spread of chain firms in many industries. The conventional explanation is that chains generate economies of scale in costs. Alternatively, the structure of chains may enhance demand by helping firms develop reputations, among other reasons. I quantify the value of these explanations empirically with a large, detailed data set on the hotel industry, combining a reduced-form analysis of revenues with a structural estimation of firm costs. Revenue analysis shows substantial evidence of a large chain premium. Cost estimation shows that after accounting for unobserved heterogeneity, chain-affiliated firms receive no cost advantage relative to independent firms.

Keywords: market structure, dynamic games estimation, retail, organizational economics