The Pricing of a Brand Name Product: Franchising in the Motel Services Industry
1 January 1999
By Dr. Lawrence Wu
This paper analyzes the price differential between franchised and independent motels. The article illustrates how hedonic regression techniques can be used to examine whether franchised firms charge higher prices than independent firms and if so, by how much. The study also examines why this may be the case: is the price premium that is associated with franchising related to the size of the initial franchise fee and the presence of repeat customers?
The results support the hypothesis that the structure of franchise contracts matter -- the prices charged by franchises are positively related to the size of the initial franchise fee. Moreover, the size of the price differential is positively related to the presence of repeat customers. These results are consistent with the view that higher franchise fees and the presence of repeat customers are factors that can help to resolve the agency problems that may arise between franchisors and franchisees.
This article was published in the Journal of Business Venturing, Vol. 14, No. 1, January 1999, pp. 87-102.
