Chapter 9: Franchises
9. Franchises Franchises are organizational forms that lie in-between vertically integrated firms and arm’s length market exchange. Firms exist to internalize transaction costs, according to Coase (1937) and Williamson (1985), and they satisfy a need for long-run contracts to facilitate exchange. Hence, at this most elementary level one can view franchises as an alternative to both vertical integration and arm’s length market exchange due to the existence of substantial transaction costs that are difficult to internalize and the need for long-run contracts to facilitate exchange. As an organizational form, franchising encompasses two very different types of franchise systems: product trade name or authorized franchise systems, and business format franchises. In the former a physical good is always one of the basic products transacted at all levels of the channel structure and the franchisees are primarily a distribution system. In the latter a process or way of doing things is always one of the basic products transacted between the franchiser and the franchisee, and a service is often one of the basic products transacted between the franchisee and the consumer. While the franchisees in this case also provide a distribution system, they often have to do much more than distribute because production and distribution are frequently inseparable in business format franchising. Finally, product trade name franchising can be traced back to the late nineteenth century whereas business format franchising becomes a significant activity after World War II. While the former type still dominates the latter in terms of actual economic size,...
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