When Franchisee's Service Affects Demand: An Application to the Car Radiator Market and Resale Price Maintenance

It is well understood that franchisee service is important to the study of franchising because it affects demand and channel performance. Many academic works address the service provision of franchisees, but that service has been difficult to quantify empirically as data are often scarce. I propose an empirical framework exploring the effect of the franchisee’s unobserved endogenous service on demand in conjunction with price and other marketing mix variables. I apply it to a unique data set from a franchise network in the car radiator market and find the economic value of unobserved franchisee service to be approximately $11–$16 for a radiator costing $105. I then explorer maximum resale price restraint and show that it can increase channel profit and franchisor royalty income as long as franchisees do not overly reduce service. Ignoring that the service provision is a franchisee's endogenous decision may result in misleading policy recommendations.