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The Elgar Companion to Transaction Cost Economics

The Elgar Companion to Transaction Cost Economics

Elgar original reference

Edited by Peter G. Klein and Michael E. Sykuta

Since its emergence in the 1970s, transaction cost economics (TCE) has become a leading approach in the research on contracts, firm organization and strategy, antitrust, marketing, inter-firm collaboration and entrepreneurship. With contributions by leading scholars in economics, law and business administration – including Oliver E. Williamson, recipient of the 2009 Nobel Prize in economics for his development of the transaction cost approach – this volume reviews the latest developments in TCE and applies them to contemporary theoretical and empirical problems.

Chapter 19: Franchising

Steven C. Michael

Subjects: economics and finance, industrial economics, industrial organisation


Steven C. Michael Franchising, in which independent businesses operate under a shared trademark using a common production process, is used primarily by service businesses. It is an enduring and pervasive organizational form. As an organizational form, franchising has a large and visible presence in consumer industries such as restaurants, lodging, auto repair, real estate, hair styling, and specialty retailing, where it has captured typically 30 to 40 per cent of sales. Business services in which franchising is prominent include temporary employment, commercial cleaning, printing and copying, tax preparation, and accounting services. Recent areas of growth include home health care, business signage, and child development and education. Historically, franchising was introduced in the US in the early twentieth century by manufacturers in order to secure local distribution of their product (Dicke, 1992). Franchise chains formed at that time still dominate automobile and gasoline retailing, and soft drink and beer distribution. This type of franchising is called product franchising. A second type, business format franchising, was initiated in the 1950s by entrepreneurs in service industries, and is the subject of this chapter. When sales from product franchises such as gas stations and soda bottlers are combined with business format franchises such as restaurants and dry cleaners, franchise chains account for over 40 per cent of retail sales in the US (International Franchise Association, 2004). Further, franchising has become a key mode of expansion for US and European firms in foreign markets; there are over one million franchisees worldwide (Michael, 2003). The mechanics...

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