Competitive Franchising

We develop a spatial model of oligopolistic competition in which firms simultaneously choose franchise locations and prices, and consumers receive uncorrelated firmspecific location shocks. Remarkably, when firms only differ along the endogenous contestable spatial dimension, they earn zero profits: while ex-post consumer heterogeneity ensures positive gross profits, competition for market share via franchise/product location results in over-provision of franchises and zero net profits. More generally, if firms face different franchise costs, the disadvantaged firm breaks even. Only when we introduce exogenous non-contestable taste heterogeneity across consumers, do both firms extract positive profits. But even here, franchise competition reduces firm profits. ∗We thank George Deltas, Stefan Krasa and Mattias Polborn for helpful comments. We also thank the audience at the 2008 North American Summer Meetings of the Econometric Society. All errors are ours.