TOWARD A THEORY OF CONFLICT IN THE FRANCHISE SYSTEM

A focused review of the literature is presented in support of a defini tion of franchising as an interorganizational form examined from the e ntrepreneurship perspective. Then, microeconomic and relational exchan ge theories provide guidance within a transaction-cost economics theor etical framework to begin the formulation of a theory of conflict in f ranchising. The analysis provided in this article involves business fo rmat franchising. We submit that the essential core and uniqueness of business format franchising is the relationship between the franchisee and franchisor. Our definition of franchising requires a review of in dividual franchisee and franchisor organizational structures. Therefor e, our theoretical analysis begins with a fundamental look at the econ omic structural differences of the average franchisor and franchisee f irms, using microeconomic theory. This review points to the potential for conflict in profit-maximizing behavior between franchisee and fran chisor. The likelihood is that the differences in behavior will manife st in pricing, promotion, and new store development. Next, because mos t business format franchising is contractually based and long-term, we investigate the theoretical support for establishing and continuing a relationship with fundamental areas of conflict Relational exchange t heory is used for this analysis. Transaction-cost economics provides a perspective on the governance of the interorganizational form and gui des us in the investigation of the ongoing state of the the relationsh ip. A key to transaction cost analysis is shared assets in the relatio nship and the degree of transferability transferability of those asset s. Therefore, building and maintaining the franchise trademark becomes the theoretical focus for governance of the relationship. We propose that franchisor-provided services is the principal method of franchiso r contract fulfillment and is the framework for informal governance of the relationship. The importance and adequacy of the transactions bet ween the franchisee and franchisor affect the perceived value of the t rademark and are key to continuing the franchise relationship. Finally , the conflict literature is briefly reviewed to provide a context for the discussion of conflict in franchising and to illustrate that conf lict can have a positive or negative effect on the relationship.