Research Summary
Research Summary
The Appropriability of Reputation in Franchises Selling Brands
Description
We develop a multi-market model in which there are two kinds of firms: brands and small firms (or agents). Firms interact with short lived clients in the market for goods (or services) and with each other in the market for franchises. The model is one of adverse selection in the sense that agents are heterogeneous with respect to their potential success in providing a quality good. This parameter is unobservable by the clients. Moreover, clients do not distinguish between self-operated branches of a brand and those who are operated by franchisers. Therefore, clients use the collective track record of brands to form their beliefs. This allows us to study the forces in the market for franchises in a realistic setup. In all equilibria, agents with different potential to supply a quality good have different valuations for a given franchise. Still, the market for franchises does not serve as a sorting device in the sense that both types end up purchasing franchises. More interesting, brands' ownership structure and average quality affect their franchises selling decisions. For brands with a small portion of self-operated branches (relative to their size), short term considerations in the market for franchises overcome long term interests in the market for goods. Consequently, brands with a lower ratio of self owned branches to size are more prone to a systematic decrease in quality and in reputation.