Contractual Discrimination in Franchise Relationships

Sawant, Rajeev J.; Hada, Mahima; Blanchard, Simon

doi:10.1016/j.jretai.2020.11.008

Cited by 8 publications

(7 citation statements)

References 48 publications

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“…As pointed out by Jensen and Thursby (2001), while “economic theory suggests that franchisors should tailor their franchise contract terms for each unit and franchisee in a chain,” the extant empirical evidence documents that—at any point in time and within the same chains—“contracts are remarkably uniform across franchisees,” despite the heterogeneity of their individual, outlet, and specific market conditions. Several studies have investigated the motives for such uniformity, mainly invoking legal considerations or simply the desire of the franchisors to grant consistency and fairness toward franchisees (presumably in the fear that reduced perception of equity induces more free‐riding and hurts performance, see Sawant et al, 2021). Our analysis offers a new economic explanation based on strategic considerations related to rent extraction maximization by part of the franchisor.…”

Section: Discussionmentioning

confidence: 99%

Equity‐settled share‐based payments and their (strategic) use under asymmetric information

Bolatto

Pignataro

2023

J Public Economic Theory

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Share‐based payments are of widespread use in today's economy. Consulting firms are increasingly accepting equity compensation for their services (particularly from startups) and many governments provide fiscal incentives to support this choice. Likewise, profit‐sharing licensing is an on‐trend business practice by innovative firms and patent holders when transferring their technology to interested adopters. This paper unveils strategic considerations according to which an agent/seller designs its optimal policy in regard to the equity share to request in exchange for its service, technology, or trademark. The model assumes a fringe of interested users/customers differentiated by both the support they need from the seller and the value of the underlying relationship; and also holding an informational disadvantage on their own type. Given the seller's cost configuration, equilibrium outcomes entail entering a profit‐sharing relationship either with the high‐type customers only or with all customers. Yet, in this case, equity‐based payment claims are —for rent extraction purposes— common (i.e., not differentiated) across types.

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Section: Discussionmentioning

confidence: 99%

Equity‐settled share‐based payments and their (strategic) use under asymmetric information

Bolatto

Pignataro

2023

J Public Economic Theory

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“…For example, franchisees are required to make substantial chain-specific investments (Lafontaine and Shaw, 2005). The longer duration of a franchise contract lowers uncertainty about the relationship's future and increases the possibility of recouping franchisees' chain-specific investment over time (Gorovaia and Windsperger, 2018;Sawant et al, 2021). Therefore, a longer contract duration is likely to increase franchisees' interests and motivate them to commit to the relationship (Brickley et al, 2006).…”

Section: The Effects Of One-sided Interests On Chain Performancementioning

confidence: 99%

Turning aligned interests into higher chain performance in franchising

Kim

Gill

2022

JBIM

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Purpose This study aims to study research on franchise chain performance that has focused on franchisors’ efforts to align their interests with those of franchisees to address partner uncertainty. In contrast, the question of what a franchisor should do to address another type of uncertainty and task uncertainty remains understudied. The authors suggest a franchisor’s coordination as a key means of alleviating task uncertainty and ongoing support and plural form as two mechanisms of coordination. The authors also posit that aligned interests between the franchisor and the franchisee improve, whereas one-sided interest impedes, chain performance. Furthermore, providing greater ongoing support or deploying plural form amplifies the positive effect of aligned interests on chain performance. Design/methodology/approach The authors relied on secondary data to test the hypotheses. The authors collected data for analysis from Bond’s franchisee guide and Nation’s Restaurant News restaurant database. They also tested the framework by analyzing 17-year, panel data of 71 restaurant chains operating in the USA and Canada using system generalized method of moments. Findings Results show that aligning interests does improve chain performance, but that the positive effect is amplified when aligned interests are matched with a chain’s provision of ongoing support or use of plural form. Originality/value The authors explicate why it is not enough to address the misaligned interests or lack of coordination alone; a chain manager needs to address both of these problems together. In addition, the authors explicate how two franchisee coordination mechanisms – ongoing support and plural form – help a chain augment the beneficial effect of aligning interests on chain performance. Without solving the twin problems of misaligned interests and coordination simultaneously, a chain is unlikely to achieve its full performance potential.

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“…Human resources literature dedicated to the context of franchises has focused on better understanding the relationship between the franchisor and franchisee (Croonen and Broekhuizen, 2019; Perrigot et al , 2020; Sawant et al , 2020).…”

Section: Hypothesismentioning

confidence: 99%

“…In a legal context, contract compliance also appears to be essential in the franchisee-franchisor relationship when serving as a formal regulator of the duties and rights of each party (Sawant et al , 2020). In the case of Brazil, the law responsible for regulating franchises presents a series of mandates with which both franchisors and franchisees must comply.…”

Section: Hypothesismentioning

confidence: 99%

Regional development and the institutional environment for franchise chains: frontiers of small and medium-sized cities

Melo¹,

Borini²,

Isaac³

et al. 2021

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Purpose The purpose of this paper is to understand and identify the various characteristics of the institutional environment and the factors that propitiate the attraction of franchise chains to cities in the interior, using Brazil as an analysis. Design/methodology/approach Secondary data from the Brazilian Institute of Geography and Statistics were used. It comprised a sample of 1,683 Brazilian cities with commercial outlets featuring franchise brands. It was limited to cities with populations of up to 100,000 inhabitants that did not constitute metropolitan regions. The statistical technique performed was multiple regression. Findings The results of the multiple regression confirm the explanatory power of R² = 36% for the analyzed model. Such presence of franchise chains is based on four institutional dimensions and their environmental characteristics: demographic (demographic density); economic and financial (average monthly salary of formal workers and number of banking agencies); business (number of active companies and presence of shopping centers); and human resources (presence of higher education units). Research limitations/implications The main contribution of the study encompasses the call that regional institutional characteristics are part of knowledge guidelines on regional development and institutional environments for entrepreneurship. In this sense, the paper contributes to studies on regional development in particular, by punctuating the characteristics of the institutional environment of cities that are related to the existence of franchise chain brands. Practical implications Such contributions are addressed to managers and directors of expanding franchise chains, given the choice of locations that best enable the concept of their franchises. The fact that only 20% of franchises have a presence in these cities, even if it is admitted that for 70% of these chains, their businesses have the capacity to make these locations viable, shows the importance of this contribution. Social implications This study is addressed to public managers, represented by secretaries of municipal developments, in view of the construction of an institutional environment conducive to entrepreneurial activity, in this specific case, by franchises. It is an important mechanism for attracting new businesses and creating a virtuous cycle of regional development. Originality/value Specifically, knowledge is generated about the insertion of ventures based on the franchise business model in small- and medium-sized regional markets. A second feature involves the understanding of the insertion of enterprises in a large and heterogeneous emerging market.

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Contractual Discrimination in Franchise Relationships

Cited by 8 publications

References 48 publications

Equity‐settled share‐based payments and their (strategic) use under asymmetric information

Equity‐settled share‐based payments and their (strategic) use under asymmetric information

Turning aligned interests into higher chain performance in franchising

Regional development and the institutional environment for franchise chains: frontiers of small and medium-sized cities

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