The Case for Franchise Encroachment

As franchisors add same brand outlets to a geographical market, the resulting encroachment from multiple locations creates con ict via revenue cannibalization. We empirically explore the possibility that encroachment could, in fact, have the opposite e ect by increasing revenues as more same brand units are added. In particular, we propose that same brand units create a spillover e ect that can heighten joint revenues from multiple units. Using detailed proprietary data from the hotel industry and other publicly available data, we identify the circumstances under which such revenue growth will be greater than cannibalization. We model the possible brand spillover e ects from encroachment into a structural demand model, and estimate it along with the supply side. Con rming the model-free evidence, we nd a statistically and economically signi cant customer preference for hotels that have more same brand establishments in the vicinity. We also nd that encroachment bene ts franchisees in markets with low same brand concentration, but is detrimental in markets where the brand is highly concentrated. A counterfactual analysis examines the impact of encroachment reduction and the impact of legislation that bans encroachment practices outright. Implications for management, public policy, and franchise strategy are discussed.