Franchise Contracts - Free Download
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FRANCHISE CONTRACTS
Antony W. Dnes
The Nottingham Trent University
© Copyright 1999 Antony W. Dnes
Abstract
Theoretical and empirical work on franchising has developed from agency
theory and from ideas about asset specificity and opportunism associated with
transactions-cost analysis.
I begin by considering some traditional arguments about the
capital-structure function of franchising. Next, I consider agency and
transaction-cost theoretical explanations of franchising. An interesting special
case is where the franchisor also runs company stores. Econometric work
supports the view that franchise contracts protect against reciprocal
opportunism. I also examine several arguments concerning the possible nature
of ‘hostages’ in franchise contracts.
JEL classification: K23, L22
Keywords: Franchising, Agency, Search Theory, Hostages
1. Introduction
Franchising is an organizational form lying between markets and hierarchies,
and can follow either a business-format or a simpler dealership model. It is a
symbiotic relationship between businesses (Schanze, 1991). Business-format
franchising, in which the franchisor supplies a brand name and also a model
business for the franchisee to copy, is the growing sector of franchising and
covers businesses like vehicle rental and fast-food restaurants. Many of the
differences between business-format franchising and dealerships (for example,
cars or petroleum) are disappearing over time as manufacturers provide a wide
range of support for their dealers. Theoretical and empirical work on
franchising has developed from agency theory and from ideas about asset
specificity and opportunism associated with transaction-cost analysis.
I begin by considering some traditional arguments about the
capital-structure function of franchising. Next, I consider agency and
transaction-cost theoretical explanations of franchising. An interesting special
case is where the franchisor also runs company stores. Econometric work
supports the view that franchise contracts protect against reciprocal
opportunism. I also examine several arguments concerning the possible nature
of ‘hostages’ in franchise contracts.
