Asymmetrical Power Distribution in Retail Channels and Cooperative Franchisors

Typical contracts assign both coercive and non-coercive means of power to the principal’s side, providing the agent with a comparably small range of countervailing anti-power. Initially agents are therefore vulnerable to opportunistic principal behavior and will rationally anticipate this threat upon signing a contract. In this paper we analyze various forms of power and explain their asymmetrical allocation in the franchising industry. We demonstrate how franchisors restore those shifts in power that seem to disorder the desired balance by performing contractual, financial and organizational adjustments. The nature of these measures suggests that franchisors should cooperate with agents despite their freedom to behave opportunistically. According to empirical data, the better a franchisor is able to credibly alleviate a franchisee’s fear of being exploited by principal opportunism, the stronger the growth generated in the entire franchise system that embraces both the company-owned and the franchise arms. Paper accepted at the EMNet-Conference on "Economics and Management of Networks" Budapest, Hungary, September 15-17, 2005