Groupe d’études et de recherche en analyse des décisions

Dynamic franchising decisions

Nathan Yang Professeur adjoint, Faculté de gestion Desautels, Université McGill, Canada

To study short-run and long-run trade-offs faced in decisions about a retailer’s franchising mix, we develop an estimable dynamic oligopoly model for retailing. In our model, forward-looking firms strategically choose expansion plans, while taking into account the relative benefits of franchised versus corporate outlets. We estimate this model using data about convenience-store expansion in Japan. Our main findings are as follows. First, we demonstrate noticeable differences in expansion strategies across ownership types. Second, we confirm that franchisee-run outlets generate higher revenues, all else held equal, than their corporate-run counterparts. Third, our cost function estimates reveal that it is more costly to open, operate, and close franchisee-run outlets compared with corporate-run outlets. Finally, our counterfactual simulations demonstrate a link between preemptive motives and corporate-based expansion.

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