Pricing Decisions in Franchised Chains: A Look at the Restaurant and Fast-Food Industry

Francine Lafontaine

NBER Working Paper No. 5247
Issued in September 1995
NBER Program(s):Industrial Organization

This paper examines empirical issues of pricing and price dispersion within franchised restaurant and fast-food chains. Given the per se illegality of resale price maintenance (RPM) under current U.S. Antitrust laws, and the fact that franchised outlets are independent businesses under the law, franchisors must delegate the power to set prices to franchisees whereas corporate chains can control downstream prices directly. The issue I examine is whether it matters empirically who, between the franchisor or the franchisee, gets to choose downstream prices, and why. After discussing a number of reasons why prices chosen by franchisees may differ from those that a franchisor would pick, I show, using data from all restaurant chains in the metropolitan Pittsburgh and Detroit areas, that there is price dispersion in fast-food franchising. I then show that the amount of price dispersion relates to the amount of franchising in a way that suggests that 1) franchisors are not able to control franchisees' prices indirectly to the same extent that they control company-owned unit prices and 2) the prices in franchised and corporate units are systematically different. Finally, I show that prices are systematically lower in corporate restaurants. This suggests that the reason behind the price differentials is not franchisor opportunism, but more likely double marginalization or, potentially, the existence of positive horizontal externalities among restaurants in a chain.

download in pdf format
   (675 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w5247

Users who downloaded this paper also downloaded* these:
Katz and Krueger w3997 The Effect of the Minimum Wage on the Fast Food Industry
Kalnins and Lafontaine w5859 The Characteristics of Multi-Unit Ownership in Franchising: Evidence from Fast-Food Restaurants in Texas
Krueger w3334 Ownership, Agency and Wages: An Examination in the Fast Food Industry
Lafontaine and Shaw w5585 The Dynamics of Franchise Contracting: Evidence from Panel Data
Card and Krueger w4509 Minimum Wages and Employment: A Case Study of the Fast Food Industry in New Jersey and Pennsylvania
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us