Vertical Restrictions and the Number of Franchises

Products for which a trademark is important are frequently sold through franchised distributors. Often with the franchise go exclusive rights to a specified geographic market, and distributors pay a franchise fee for the right to sell in this market. Franchises are common, for example, in the distribution of newspapers, motor vehicles, apparel, gasoline, and fast foods. This paper explores how an upstream monopoly decides to set a franchise fee to downstream distributors or retailers when the number of such outlets in endogenous. When the monopoly authorizes a franchise, the retailer buys an input from the monopoly that is used to produce sold to the retailer and it is assumed there is one-to-one correspondence between this product and the units sold by the distributor.