Edited by Peter G. Klein and Michael E. Sykuta
Chapter 20: The Structure of Franchise Contracts
Emmanuel Raynaud The word franchise comes from an old French word meaning ‘privilege’ or ‘freedom’. In the Middle Ages a franchise was a privilege or a right. In those days, the local sovereign or lord would, for instance, grant the right to hold markets or fairs. Eventually, the king could grant a franchise for many commercial activities such as building roads and the brewing of ale. The modern use of the term, as business franchising, is in the same spirit. Franchising may be defined as a contractual agreement in which one firm, the franchisee, buys from another firm, the franchisor, the right to operate under a particular trademark and follow a set of guidelines.1 In 2001, franchised businesses operated in the US 764 483 outlets and accounted for 7.4 per cent of all private-sector jobs.2 This chapter adopts a ‘contractual’ approach to the study of franchising. It explains the role of franchising as an efficient governance structure – that is, as an attempt to mitigate various contractual hazards (Williamson, 1996; Blair and Lafontaine, 2005). It omits the industrial-organization literature that explains governance choices as strategic tools to mitigate actual or potential competition (see Lafontaine and Slade, 2005). Franchising is an interesting ‘contractual laboratory’ for at least two reasons: first, data on organizational design in franchising are available that allow empirical analysis. Insights gleaned from studies on franchised chains allow researchers to understand better how firms organize their activities across business units and markets much more generally. Second, franchising agreements include several...
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