Credible Spatial Preemption through Franchising

Gillian K. Hadfield

RAND Journal of Economics, 1991, vol. 22, issue 4, 531-543

Abstract: The analysis of strategic behavior frequently revolves around the problem of identifying commitment "technologies" that credibly expand strategic opportunities. This article revisits the question of spatial preemption to investigate the potential for organizational form to serve as a commitment technology in the effort to deter entry. The analysis demonstrates first that delegation of pricing authority to independent outlet operators through a franchise contract can deter entry. Moreover, this delegation can be made credible in the sense of being renegotiation-proof through appropriate contractual design.

Date: 1991
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