Franchising Agreements in New Car Retailing: An Empirical Investigation

Abstract

The retail distribution of new cars in the UK is controlled by a system of franchised dealerships. The relationship between the dealers and the manufacturer represents an individually agreed contract for selling new vehicles through the manufacturer'S selected dealers. Meanwhile, the number of franchised dealerships is in decline due to weak trading conditions in the UK new car market. This means that dealers have to compete for a reduced volume of new cars. This research paper empirically tests five hypotheses about the effects of incentive payments and management control on brand investment, retail level of service, and monitoring frequency of the dealer's business.It was found that high financial reward to the dealerships resulted in higher investment level in retail services. Management control costpositively affects monitoring frequency, and monitoring costs negatively affect service levels. It finds strong empirical support for the hypothesis that management control costs inversely affect manufacturer's monitoring frequency of the dealer's business. The paper analytically extended previous knowledge in management control cost relevant to new car retailing in the United Kingdom.