Maintaining Quality Standards in Franchise Chains

In the present paper we identify those characteristics of the markets served by a franchise chain which determine the relative incentives of the owner of the chain to monitor the behavior of individual franchisees. We find that the owner has greater incentives to monitor the outlets that serve the relatively smaller markets and those that are subject to greater fluctuations in the state of the demand confronting them. We also find that the extent of competition with other chains has an ambiguous effect on the incentives to monitor the franchisees: