An Incomplete Contracting Model of Dual Distribution in Franchising

Dual distribution in franchising is addressed from an incomplete contracting perspective. We explicitly model cooperative (dual distribution) franchising as an organizational form, next to wholly-owned, wholly-franchised, and dual distribution franchise systems. Key conclusions of the model are: (1) dual distribution as an efficient governance mechanism does not depend on heterogeneous downstream outlets, and (2) whether dual distribution or some other organizational form is efficient depends on the size of the benefits to dual distribution relative to the parties’ costs of investing.

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► Wholly-owned, wholly-franchised, and (cooperative) dual distribution systems are distinguished.
► Efficiency of dual distribution does not depend on heterogeneous downstream outlets.
► Efficient governance structure depends on the dual distribution benefit relative to investment costs.