In the present paper we identify those characteristics of the markets
served by a franchise chain which determine the relative incentives of
the owner of the chain to monitor the behavior of individual franchis
ees. We find that the owner has greater incentives to monitor the outl
ets that serve the relatively smaller markets and those that are subje
ct to greater fluctuations in the state of the demand confronting them
. We also find that the extent of competition with other chains has an
ambiguous effect on the incentives to monitor the franchisees.