Territorial Restrictions in Franchise Contracts

Frank Mathewson and Ralph Winter ()

Economic Inquiry, 1994, vol. 32, issue 2, 181-92

Abstract: Efficient contracts set incentives through the assignment of rights and profit shares. Although efficient contracts have been used to explain the nature of the firm, the use of contractual rights in specific business contracts is relatively unexplored. The authors analyze contractual rights in franchise systems, in particular the right to add franchisees. An exclusive territory assigned to an initial franchisee is not an immutable guarantee but rather a starting point for subsequent renegotiation in the franchise relationship. Exclusivity is, therefore, profitable when franchisee efforts are critical to the venture. A sample of franchise contracts reveals evidence consistent with the model's prediction. Copyright 1994 by Oxford University Press.

Date: 1994
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