FRANCHISING VERSUS CORPORATE-OWNERSHIP - THE EFFECT ON PRICE DISPERSION

This paper uses data on the prices charged at fast-food restaurants in the metropolitan Pittsburgh and Detroit areas to assess the effect of franchising on price dispersion within chains in fairly narrowly defi ned geographical areas. A review of reasons why firms may face more pr ice dispersion under franchising guides the empirical analyses. Result s indicate that I) franchisors do not aim for fully uniform prices eve n on the corporate side of their chains, 2) the degree of price disper sion is highest for firms with both franchised and company-owned units , as predicted by models implying a systematic price differential betw een units operated under these different contracting mechanisms, and 3 ) price dispersion for fully franchised chains is greater than for ful ly corporate chains. These last two results, combined with evidence fr om court cases that franchisors sometimes try to control franchisee pr ices directly, suggest that franchisors indeed lose some amount of con trol over prices charged to customers when they use franchising as opp osed to corporate ownership. Finally, I find a positive effect of the royalty rate on price dispersion. This suggests that double marginaliz ation is behind at least some of the higher prices found in franchised units in the existing literature. (C) 1998 Elsevier Science Inc.