Horizontal Strategic Interactions in Franchising
This paper studies a franchise system in which a franchiser sets his rate of brand image advertising and two franchisees in the same market set their respective local service provision and promotional advertising rates. The franchiser’s brand image advertising and the franchisees’ provision of local service influence current and future sales through the franchise goodwill, while the franchisees’ local promotional advertising only impacts current sales. The model allows local promotional competition and free-riding on the franchise goodwill. Stationary feedback Nash equilibria are derived and compared in both cases of cooperation and noncooperation between franchisees. Our results suggested that, in some conditions, it is wise for franchisees to cooperate in setting their decisions to overcome these horizontal externalities. Cooperation between franchisees does not affect the franchiser’s advertising policy, but improves his profits.
KeywordsStationary Feedback Demand Function Local Service Channel Member Marketing Channel
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