Chapter 10: Franchising

A large number of small businesses benefit from long-term relationships with bigger businesses through contracts of franchising. In the United States, there are approximately one million business establishments involved in franchising. This chapter will consider some research on small businesses in franchising. A franchise is a long-term relation between two businesses that is aimed at their mutual benefit. To the extent that it is successful, the relationship will generate a surplus, which economists call a “quasi-rent” and others might designate as value creation. This poses at least two questions. First, how can the governance of the relation be arranged so as to yield the largest surplus? Second, how is the surplus divided between the participants? The answer to both questions, but especially the second, will depend on the bargaining power of the participants. These questions will be taken up in turn, but first we will expand on the definition of franchising.