Scale, Scope and Takeovers: Evidence from Franchised Chains

We use data on the largest U.S.-based franchised chains, measured by worldwide sales, from 1998 to 2007, to explore scale and scope (or spillovers) effects. Because franchised chains are fundamentally single-product or single-concept entities that usually continue to be developed separately when they belong to multi-chain firms, we can distinguish scale from scope effects much better than in most of the literature to date. We can also identify takeovers more straightforwardly. After controlling for chain unobserved heterogeneity via fixed effects, we find strong evidence of positive scale effects within a chain, suggesting positive spillovers or network advantages from being large. For parent company scope, i.e. product variety measured by the number of other chains of the same parent, we find no effect on sales per outlet, but a negative effect on the number of outlets of a chain. We also find that takeovers have no effect on sales per outlet in the target chain, but they reduce numbers of outlets in the years that follow. Overall, our findings suggest that firms engage in some form of rationalization, or reduce competition among their chains/products, after taking them over. Preliminary and Incomplete – Please do not quote 2