Why Are Royalty Rates Higher in Service‐type Franchises?

Ram C. Rao and Shubashri Srinivasan

Journal of Economics & Management Strategy, 1995, vol. 4, issue 1, 7-31

Abstract: Royalty payments from a franchisee to a franchisor serve as incentive for the franchisor to provide appropriate levels of quality and brand, name investment. However, since they also distort the service provided by the franchisee, we should expect relatively lower royalty rates in franchises that are primarily service‐oriented. Casual examination of royalty rates across product‐oriented and service‐oriented franchises shows that the opposite is true, with service‐type franchises enjoying higher royalty rates. We resolve this apparent puzzle. The basic argument we put forth is that in product‐type franchises, a franchisor can charge a wholesale price on goods transferred to the franchisee, thus using an alternative instrument that also serves as an incentive for the franchisor. Moreover, in general, a franchisor will use both wholesale price and royalty to minimize distortions in retail price and service at the retail level. We then test the predictions of our model on different industries and find confirmation for the same.

Date: 1995
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

Downloads: (external link)
https://doi.org/10.1111/j.1430-9134.1995.00007.x

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:jemstr:v:4:y:1995:i:1:p:7-31

Ordering information: This journal article can be ordered from
http://www.blackwell ... ref=1058-6407&site=1

Access Statistics for this article

More articles in Journal of Economics & Management Strategy from Wiley Blackwell
Bibliographic data for series maintained by Wiley Content Delivery ().