Dynamic Franchising Decisions

We study retail growth and organizational form when firms have an option of expanding via a mix of corporate-run stores and franchisee-run stores. Under the context of the convenience store industry dynamics in Japan, we estimate a newly developed dynamic oligopoly model that allows the organizational structure of their expansion to be part of the forward-looking strategic decisions. First, we demonstrate noticeable differences in expansion strategies across ownership types. Second, we confirm that franchisee-run outlets generate higher revenues (all else held equal) than their corporate-run counterparts. Finally, our sunk cost estimates reveal that it is more costly to open (and close) corporate-run outlets than franchisee-run outlets. Our results suggest that both revenue and cost considerations are important drivers behind franchising decisions. Despite such benefits of expansion via franchisee-run outlets, our results also show that corporate-based expansion can still be rationalized, as franchisee-run outlets are more sensitive to cannibalization. Furthermore, our counterfactual analysis provides a salient connection between preemptive motives and expansion via corporate-run outlets, despite the inferred revenue and cost-based benefits of franchisee-run expansion. Finally, we show that a sudden increase in the share of corporate-run outlets may precede a threat of entry.

Keywords: Dynamic structural estimation, Encroachment, Entry deterrence, Franchising, Industry dynamics, Firm performance, Market structure, Moral hazard, Ownership structure, Resource scarcity, Retailing.

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