Ownership Structure , Managerial Incentives , and the Intensity of Rivalry

This study investigates how ownership forms affect managerial incentives and pricing in different competitive contexts. We explore how the difference in ownership form between franchised and company-owned units influences the incentives of the managers who take the day-to-day decisions that constitute interfirm rivalry. We argue that chains with company-owned units may restrict decision-making of local units as a credible commitment device to maintain high prices. Furthermore, we argue that the payment of royalty fees reduces the net available revenues of franchisees, which provides an incentive to increase the price they charge to customers. Using a proprietary dataset of the Texas hotel industry, our findings confirm these hypotheses and form one of the first empirical confirmations of what is called strategic incentives theory. By elucidating the competitive consequences of ownership forms, this study allows managers to take these consequences into consideration when determining the ownership structure of local units.