Present an Economic Analysis of the Retail Franchise Contract
The first part of this study has explained the economic analysis of the retail franchise contract, and then demonstrated the literature explanations of the existence of share franchise contracts. The recent increased popularity of franchising lies in the nature of the contract that ensures that both parties have incentives in the ongoing success of the relationship. Literature is supportive to the two-sided moral hazard model, which stresses the importance of incentives and monitoring problems between the two parties involved (Dark 1987, Norton 1988, Lafontaine). Moreover, it was suggested that franchising facilitates to fast growth of the firm (Thompson 1994, Lafontaine 1992, 1996). The second part explained the reasons why should the franchisor leave rents with franchisee by examining one of the most successful franchises in fast-food industry (McDonald's).
The findings presented by Martin (1988) and Thompson (1994) argue for the existence of life cycle in franchising, and supported the notion of cyclical reversion to ownership. However, due to the lack of empirical support, these results cannot give generalizable conclusions of the franchise activity over time.
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