یک مدل قرارداد ناقص توزیع دوگانه در فرانچایزینگ

Dual distribution in franchising is addressed from an incomplete contracting perspective. We explicitly model cooperative (dual distribution) franchising as an organizational form, next to wholly-owned, wholly-franchised, and dual distribution franchise systems. Key conclusions of the model are: (1) dual distribution as an efficient governance mechanism does not depend on heterogeneous downstream outlets, and (2) whether dual distribution or some other organizational form is efficient depends on the size of the benefits to dual distribution relative to the parties’ costs of investing.

Franchising is an important business phenomenon in retail. There are about 1500 franchise chains with more than 760,000 franchisees operating in the U.S; over 18 million people are employed by them; they are responsible for over $1.53 trillion in economic output; and sales through franchise have accounted for a significant portion in the following industries: quick service restaurants (56.3%), lodging (18.2%), retail food (14.2%) and full service restaurants (13.1%) (Reynolds 2004). There is considerable governance structure variety in franchising (Maness 1996). Blair and Lafontaine (2005, p. 88) provide statistics regarding the number of wholly franchised chains (where all outlets are franchised), dual distribution chains (where some outlets are franchised), and wholly-owned chains (where no outlets are franchised, i.e. all outlets are company-owned). Well-known examples of the first type are Baskin-Robbins USA Co., and Allegra Print & Imaging. McDonalds, 7-Eleven Inc., and Jackson Hewitt Tax Service are examples of dual distribution chains. Sears, Wallmart, K Mart, Red Lobster and Starbucks are examples of the third type, i.e. they are 100% company-owned in the U.S. Dual distribution franchising is most widespread of these governance structures. Evidence regarding dual distribution franchising shows that it is stable over time, i.e. the percentage of franchised units remains fixed after the early years in franchising. Lafontaine and Shaw (2005) show that the percentage of franchised outlets of experienced franchisors is about 85% on average. There are substantial cross- and within-sector differences. For example, restaurant chains have a higher percentage of company-owned outlets on average than the construction and maintenance sectors. For example, the car rental companies Hertz and National have high levels of company ownership (66% and 40%, respectively), while Budget, Thrifty, and Dollar have much lower levels of company ownership. Franchises establish a stable percentage usually after seven years. Their empirical results show also a strong positive relationship between brand value and the percentage of company-owned outlets. Our equilibrium model is addressing these features of established franchises. One of the main contributions of this article is to delineate the circumstances when dual distribution franchising is the unique efficient governance structure.1 These governance structures in franchising are well known ways of organizing franchising, like the public corporation being the dominant way of organizing production in the economy at large (Rajan and Zingales 2000). However, other governance structures are adopted in the economy, like supplier cooperatives, worker cooperatives, and nonprofits (Hansmann 1996). Franchising shows also more variety than the above three types. For example, franchisees own the brand and the business format of Best Western hotels. Other examples are ACE Hardware, True Value hardware, and Straw Hat Pizza. These cooperative (dual distribution) franchising governance structures are not limited to the USA. For example, drug store DA, retailers Intres and Euretco (fashion, sports, furniture), Primera convenience stores, Top Movers and Motoport are examples of cooperative franchises in the Netherlands. Retail chain Intermarché in France has members and franchisees developing franchising. It consists of supermarkets, some hypermarkets and other stores specialized in clothes (Vêti), fast food (Restaumarché), Do It Yourself (Bricomarché), and hard discount stores (Netto). Système U in France consists of convenience self-service stores (Marché U), supermarkets (Super U) and some hypermarkets (Hyper U). These companies are cooperatives with a bottom up governance system. Intersport and 3e AG are cooperative franchises in Austria. In these cooperative franchise chains, either all outlets together own the brand and the business format, or some outlets own the brand and the business format. We label the former as cooperative franchising and the latter as cooperative dual distribution franchising. Another main contribution of this article is that we explicitly model cooperative (dual distribution) franchising, which has received little attention in organizational economics. A standard way of delineating a governance structure is to distinguish income rights, addressing the question ‘How are benefits and costs allocated?’, and decision rights, addressing the question ‘Who has authority or control?’ (Hansmann 1996). The value of an efficient governance structure is that it provides all parties with incentives to invest in such a way that the entire franchise system generates the highest value. We focus on changes in the structure of decision rights as an alternative to changes in royalty rates (income rights) and legal protections for franchisees for achieving satisfactory levels of franchisees’ investment and motivation. The choice of governance structure is addressed by answering two questions: What is the incentive to invest for each party in the franchise system in each governance structure? Which governance structures are efficient under which circumstances? These questions will be addressed in an incomplete contracting model with transaction specific investments and dual distribution benefits. We motivate these aspects of our analysis now. Incomplete contracting theory starts with the observation that there are limits to contracting due to the complexity of the real world, like the complexity of a transaction or the vagueness of language. It is too costly to describe all relevant contingencies regarding the exchange ex ante in a contract. Contracts are therefore necessarily incomplete.2 Meaningful contracts can only consist of clauses which are observable and verifiable by a third party. Clauses which are observable but not verifiable have to be left out of the contract because they are not enforceable. Contractual incompleteness entails that it is hard to verify ex post that a party has made an investment and the associated costs. This occurs with specific, irreversible (or sunk) investments, i.e. investments which have a significant higher value within the relationship than in alternative uses (Klein, Crawford, and Alchian 1978). These investments occur in so many ways that various types are distinguished (Williamson 1985): site-specific investments, human asset specificity, physical site asset specificity, dedicated assets, and brand names. Examples in franchising are local advertising and customer service, quality control, human resource management, and product innovation by the franchisees (Sorenson and Sørensen 2001), and the franchisor investing in system-specific assets like know-how and the brand name (Klein and Leffler, 1981 and Norton, 1988). Specificity of investments entails that the costs of investment are paid by the investing party. The incompleteness of contracts causes problems when the parties involved in the exchange make specific, irreversible investments. It will give rise to ex post opportunistic behavior regarding the remaining surplus. The reason is that the interests of the franchisees and the franchisor are usually not completely aligned with the interests of the entire franchise system. Illustrations are the concerns about free-riding by franchisees on the brand name and territorial encroachment of franchisors adding new units of their brand proximately to their franchisees’ existing units (Kalnins 2004). It will therefore be assumed that each party maximizes its own profit, not the profits of the franchise system. The investor recognizes his weak bargaining position once the investment has been made, i.e. he anticipates that the other party may take advantage of the contractual incompleteness by claiming a larger share of the ex post surplus than initially agreed upon. He may decide not to invest in the project generating the highest surplus. This is the (inefficient) hold-up problem (Klein, Crawford, and Alchian 1978). A suitable choice of governance structure mitigates or even eliminates the hold-up problem. The allocation of decision rights entails a distribution of bargaining power because it allocates ownership over assets to the franchisor and the franchisees. This has an impact on the incentive to invest for each party. Brickley, Dark, and Weisbach (1991), Gallini and Lutz (1992), Mathewson and Winter (1994), Lutz (1995) and Dutta, Bergen, and Heide (1995) emphasize already the importance of ownership in determining the incentives to invest in different governance structures from a transaction cost economics perspective. Notice that decision rights are relevant next to income rights due to the incompleteness of contracts. Incomplete contracts are completed by the allocation of authority in order to decide in circumstances not covered by the contract. Decision rights matters therefore only for the incentive to invest in non-verifiable investments. Windsperger and Dant (2006) provide support for this perspective in a franchising context. Maness (1996) formulates an incomplete contacting model with a focus on income rights. We focus on the allocation of decision rights in franchising and its impact on the investment in specific assets, like the brand name and local market knowledge. Decision rights in franchising are emphasized by Combs, Michael, and Castrogiovanni (2004, p. 907) when they characterize a franchise as ‘… one firm (the franchisor) sells the right to market goods or services under its brand name and using its business practices to a second firm (the franchisee)’. His definition stresses the importance of the brand and the business format in franchising, and the right to market goods or services. An important aspect of our model is that there are unique benefits related to dual distribution. Dual distribution benefits are not specific to certain outlets, but specific to the composition of the portfolio of outlets in the franchise system, i.e. it is a systemic or synergetic effect. They arise only when there are company owned outlets as well as outlets run by entrepreneurs. We illustrate the systemic effect with an example. Organizational learning increases performance when there is exploitation as well as exploration in the franchise system (Bradach, 1997 and Sorenson and Sørensen, 2001). An organization engaged in only exploration looses economies of scale, while an organization devoted to exploitation misses opportunities due to changes in the environment. A dual distribution franchise is doing both types of learning because incentives are usually structured in such a way that the company-owned units refine existing routines, i.e. exploit, while entrepreneurs running franchises explore more new resources and novel routines. Company-owned units and franchised units therefore complement each other. There are many sources of dual distribution benefits. The appendix provides an overview of the literature that supports our claim that there are dual distribution benefits under certain conditions. (The appendix provides also a general formulation of dual distribution benefits in order to capture cross-investments.) The dual distribution benefit is modeled as an exogenous parameter. This parameter is to be interpreted as a reduced form of an underlying model, which can be specified in various ways as witnessed by the articles reviewed in the appendix. Another reason for modeling the dual distribution benefit as an exogenous parameter is to have the main focus on the impact of governance structure on the incentive to invest for the franchisor as well as the franchisees. The paper is organized as follows. We start with presenting the model. Next we determine the incentive to invest for each party in each governance structure. Subsequently the efficient governance structures are determined, and empirical and managerial implications are formulated. Finally, we conclude.

The incomplete contracting framework has been applied to identify the circumstances when dual distribution in franchising is the unique equilibrium governance structure inducing investment by the various parties exactly when it is efficient to do so. Dual distribution franchising is the sub-game perfect equilibrium governance structure when the dual distribution externalities are significant and the cost of investment is not too large for the parties involved. Cross-network differences in the extent of company ownership depend therefore on the magnitude of the dual distribution benefits and the importance of the franchisees’ ex ante investments. Dual distribution as an efficient governance structure does not depend on heterogeneous downstream outlets. Cooperative franchising (decision rights) has been presented as an alternative to changes in royalty rates (income rights) and legal protections for franchisees for achieving satisfactory levels of franchisees’ investment and motivation. Whether the dual distribution benefits are realized in a traditional franchise or a cooperative franchise depends on whether most value is added upstream or downstream. A disadvantage of dual distribution is the deterioration of the investment incentives of the party having no authority, i.e. either the company-owned outlet manager in a traditional franchise or the franchisor in a cooperative franchise. A wholly-franchised system may therefore be efficient even when unique dual distribution benefits are present. Further research may be guided by extending the model in various directions. A number of possibilities are formulated. First, actual franchise systems exhibit a substantial power asymmetry between small franchisees and the large franchisor. One way of restoring the balance of power is to erect a franchisee council (Ehrmann and Spranger 2007) and to study the optimal allocation of rights to them. Our model can be tailored to this issue in a straightforward way by modeling countervailing power as an association of various distributors. Second, the model considers only the allocation of ownership. A more general approach is to view organizations as an incentive system, considering also other instruments to align interests. Decision and income rights are treated simultaneously in the choice of governance structure (Bai and Tao, 2000, Bradach and Eccles, 1989, Holmström and Milgrom, 1994 and Windsperger and Yurdakul, 2007). For example, many franchises spend considerable effort in designing appropriate franchisee incentive schemes, including a franchise fee, royalty rates, preventing free riding by the franchisees on the brand name, and monitoring. Finally, we assume that the efficient governance structure emerges in the first stage of the game. This is a good assumption to start an analysis of governance structure choice, because a competitive market in governance structures will lead to displacing the relatively inefficient governance structures by the relatively efficient ones. However, there is often a tension between efficiency and distributional considerations due to vested interests of incumbent parties or strategic considerations in competitive settings. For example, efficiency may dictate ownership redirection, but the party loosing power will not favor this change. Efficiency may dictate a drastic change in governance structure, but these other considerations may prevent that the change occurs.