Market saturation or market concentration: Evidence on competition among U.S. limited service franchise brands

Abstract

This study uses 1997 and 2002 U.S. Economic Census data for sales per establishment measures of performance and examines the effects of market structure and concentration in a cross-sectional analysis of 55 metropolitan areas. The findings challenge traditional perspectives on market concentration, whereas markets with higher concentration ratios based on a brand’s outlets and revenue were found to have significantly lower sales per establishment. Conversely, markets with greater variety of franchised and non-franchised restaurants show above average performance. The results indicate the existence of an institutional submarket within a broader market of limited-service restaurant types, where evidence for competition exists among only the leading franchised formats, with non-franchised formats exhibiting little or no effects on the overall market’s sales per establishment. Both franchisors and franchisees considering entry into a new geographic market should continue to evaluate traditional measures of sales per store, and if unavailable, examine the concentration or variety of competitors at the brand level to estimate the potential for new establishments.