A game theoretical approach to franchising arrangements

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Abstract
The paper explores interactive relationships between a franchisor and a franchisee. We investigate issues of non-cooperation and cooperation between channel members, using game theoretical concepts as the foundation for the analysis of these issues. First, we model the relationship between the franchisor and the franchisee as a non-cooperative two-stage game. The franchisor, as the leader, specifies the fixed lump-sum and the royalty fee and the franchisee, as the follower, then decides on the retail price. Second, we address the problem of cooperation between franchisor and franchisee, taking into consideration the effect of the franchisee's risk attitude on cooperation and illustrate the consequences of mutually beneficial incentives. We also look at conditions under which both members prefer to cooperate, and conditions under which only one member prefers to cooperate, and the associated optimal payment schemes.

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