Divisionalization, Franchising, or Mixing: A Market Competition Perspective

Chi-Chih Lin ()
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Chi-Chih Lin: Department of Economics, Fo Guang University, Taiwan

Journal of Economics and Management, 2010, vol. 6, issue 2, 157-174

Abstract: This paper considers strategic delegation for analyzing the optimal retail-organizational form for a firm. Our results indicate that expansion by a mix of divisions and franchises is possible, provided that there exists hierarchical conflict, the market is medium-sized, and the products are imperfect substitutes. The sales maximization for divisionalization plays an important role in the choice of retail-organizational form. This stems from the fact that the equilibrium outcome of profit delegation is more competitive than that of market share delegation, which itself is more competitive than that of sales delegation, where firms rely on expansion by a mix of divisions and franchises. Consequently, firms do not franchise to avoid a cost disadvantage, provided that top managers are guided by profit maximization. When the objective of each top manager is market share maximization, all top managers expect their rivals will retaliate, and this reduces the temptation to be aggressive in the first place. Accordingly, firms do not divisionalize to relax interbrand competition.

Keywords: divisionalization; franchising; market sale; product differentiation (search for similar items in EconPapers)
JEL-codes: D43 L10 L20 (search for similar items in EconPapers)
Date: 2010
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