On Franchise Royalty Rates, Franchise Fees and Incentive Effects

Abstract

Franchising has become a major business model (particularly in the retailing and hospitality industries), and has substantial effects on company strategy, growth and survival. There are at least 1,500 operating franchising networks in the U.S. that represent more than 760,000 franchisees and almost 18 million employees, and provide more than US$506 billion of payroll (or about 11% of the U.S. private sector payroll) and generating a total economic output that exceeds US$1.5 trillion (about ten percent of the U.S. private-sector economy). This article: a) critiques existing theoretical and empirical studies on franchise contracts, franchise royalty fees and incentives, b) critiques the use of game theory in franchising studies, c) introduces a new franchise incentive system and dynamic franchise fee/royalty system, d) introduces optimal conditions for royalty systems in franchising.