Sorting, Franchising and Real Estate Brokerage Firms

Abstract

Real estate markets remain localized and reflect differences by region. With a large number of brokerage firms and a smaller number of franchisors, a testable hypothesis is whether in equilibrium fees and royalties are equal to the additional return to the franchisee. If fees are set uniformly across the country, economic rents may be earned in specific local markets. Some franchisees may earn excess profits from the franchise arrangement. Empirical results for 1,143 United States residential brokerage firms in 2001 show standardized uniform franchising costs, cover any added returns to franchises in the Midwest and South. Excess returns are present for franchisees in the Northeast. The probability of being a franchisee increases with size and scale.

Keywords: franchise, residential brokerage, self-selection, profitability, regional variation, fees, royalties