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A Model of Free Riding Incentives in Franchise Chains
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- Authors
- Issue Date
- 2004-06
- Citation
- Seoul Journal of Business, Vol.10 No.1, pp. 81-104
- 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
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