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Franchising as a plural system: A risk-based explanation

Thomas Bürkle and Thorsten Posselt

Journal of Retailing, 2008, vol. 84, issue 1, 39-47

Abstract: Empirical studies show that most franchise systems consist of both franchisee-owned and franchisor-owned units. We contribute a new theory that explains why such a mixture exists, using a model that focuses on the franchisor's optimal risk allocation. The costs of risk and controlling franchised units explain the varying fraction of franchisee-owned to total selling units, and the incentive to franchise decreases with an increasing fraction of franchisee-owned to total selling units, as well as with decreasing costs of control. Our explanation for these plural systems is consistent with the ownership redirection hypothesis.

Keywords: Franchising; Plural systems; Optimal mixture of franchised and system leader-owned units; Insurance; Risk premium (search for similar items in EconPapers)
JEL-codes: M31 D81 (search for similar items in EconPapers)
Date: 2008
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Handle: RePEc:eee:jouret:v:84:y:2008:i:1:p:39-47