| Franchising is a channel of distribution traditionally used for services and products "manufactured" at the point of purchase. A franchise system is based on a contract between two' parties: a manufacturer or service-provider, known as franchisor, and a downstream distributor, known as franchisee. The contract allows the franchisee to do business under the franchisor's trade or brand name, and sometimes using its recommended business format, in a particular territory. In return, the franchisee, pays a royalty on the gross sales and often an initial fee and other additional royalties. A vast literature exists, especially in Economics, looking at the reasons for the existence of this form of channel.; Most of this literature has studied the traditional single-outlet setting where each franchisee owns and operates a single outlet. This setting provides the ideal case for comparison between a salaried manager and an owner-manager. Empirical evidence, however, indicates an increasing trend for franchisors to allocate more than one outlet to their franchisees, i.e., follow multi-unit franchising. This trend is puzzling, as it goes counter to much of the conventional logic of franchising. There are various modes of multi-unit franchising. The theories used to explain single-unit franchising are not able to provide a satisfactory explanation for the puzzling existence and the growing popularity of multi-unit franchising: Though several conjectures have been offered in the literature, there is no comprehensive explanation for all the modes of multi-unit franchising.; In this dissertation, I propose that a monitoring hierarchy suffers from several inherent defects, and that franchisors use multi-unit franchising to escape these problems of hierarchy under circumstances in which they are likely to be acute. In such cases, a franchisor attempts to either remove hierarchical relationships or shift the burden of hierarchy over to a large number of multi-unit franchisees. I use twelve years of duration data and a separate detailed cross-sectional data to test the hypotheses. Along with testing this explanation, I also show lack of support for an alternative, the competing explanation of resource constraints, which has been forwarded by some scholars. |
