SHERP

A Model of Free Riding Incentives in Franchise Chains

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Authors
Lee, Janghyuk
Issue Date
2004
Publisher
College of Business Administration (경영대학)
Citation
Seoul Journal of Business Volume 10(1):81~104(2004)
Keywords
Franchise; service quality; externalities; free riding
Abstract
This paper explains the free riding phenomenon in franchise chains
where all chain members benefit mutually from the positive network
externality of service quality. Starting from a simple formal model with
two independent outlets, we present the analytical form of the optimal
reaction function in which two outlets interact through service quality
externalities. With complete information, no outlet finds any interest in
free riding on service quality at the expense of the other. Contrary to
previous findings, the positive demand externality increases the optimal
service quality through interactions among chain members with
complete information. By relaxing the complete information
assumption, we demonstrate that incompleteness of information is the
main source of free riding incentives. Contrary to the prevailing
explanation based on agency theory, incompleteness of information
leads outlets facing a smaller externality to free ride more on service
quality compared to its optimal level with complete information.
ISSN
1226-9816
Language
English
URI
http://hdl.handle.net/10371/1800
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College of Business Administration/Business School (경영대학/대학원)Dept. of Business Administration (경영학과)Seoul Journal of BusinessSeoul Journal of Business Volume 10, Number 1/2 (2004)
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