The effects of franchising on stores, competitors, and consumers

Abstract

Following a corporate acquisition, a casual dining chain sold all of its company-owned stores to franchisees. I exploit this change in franchise status to estimate the effects of franchising. I use a utility-based choice model to predict alcohol sales for all liquor-selling bars and restaurants in Texas over a 10-year period. Using this model, I find that franchising a restaurant increases its revenues by 7 percent. A substantial share of this revenue increase comes at the expense of competing national chains. I also find that franchising a store produces a consumer utility gain equal to the gain that would result from a 2.8-mile reduction in distance from the individual's home to the store.