Firms` Strategic Decisions: Theoretical and Empirical Findings

Firms` Strategic Decisions: Theoretical and Empirical Findings

Volume: 2

Indexed in: Book Citation Index, Social Sciences & Humanities, EBSCO.

This is the second volume of the book series featuring empirical research conducted on business decision making policies of oligopolistic organizations. This volume brings together 11 chapters that ...
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Royalty Structures and Franchisee’s Investment Incentive

Pp. 198-216 (19)

DongJoon Lee, YongHoon Choi and SangHeon Han


We analyze two royalty structures in a two-tier industry in which a franchisee makes a demand increasing investment. Suppose the franchisor can propose either a margin-based royalty (MBR) or a sales-based royalty (SBR). We show that the SBR has the advantage of providing a greater incentive for the franchisee to invest, but has the disadvantage of inducing a greater double-margin distortion. On the other hand, the MBR has the advantage of influencing a smaller double-margin distortion, but has the disadvantage of weakening the incentive for the franchisee to invest. Our main claims are two: the first is that if the market is non-elastic, the franchisor enjoys a higher pay-off from SBR than from MBR. The other is that the investment level under SBR is always larger than that under MBR, regardless of market elasticity.


Double marginalization, downstream firm, franchisee’s investment, franchisor, margin-based royalty, market elasticity, royalty structures, sales-based royalty, successive monopoly, take-it-or-leave-it contract, upstream firm.


Faculty of Commerce, Nagoya University of Commerce and Business, 4-4 Sagamine Komenoki-cho Nisshin-shi, Aichi 470-0193, Japan.