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Advertising fee in business-format franchising

Publication ,  Journal Article
Desai, PS
Published in: Management Science
January 1, 1997

Most franchisors charge an advertising fee in addition to the better known royalty and franchise fee. We study the role of the advertising fee in improving channel coordination. We begin our analysis with a simple case of one franchisor dealing with two identical franchisees and find that the advertising fee allows the franchisor to commit to a specific level of advertising spending at the time of contract acceptance. We also find that the lump-sum advertising fee is better than the sales-based advertising fee. These results are intriguing because most franchisors use the sales-based advertising fee. We show that when franchisees' markets differ in how advertising affects sales, the franchisor may prefer the sales-based advertising fee. There are two reasons for the higher profitability of the sales-based advertising fee. First, the sales-based advertising fee conditions the franchisor's advertising decision on the franchisees' price and service decisions, and induces them to make better price and service decisions. The second reason is that with heterogeneous franchisees, using the sales-based advertising fee does not increase the total sales-based component in the fee structure. These results also hold when the franchisor pledges to contribute a matching fraction of the advertising fee to the advertising fund.

Duke Scholars

Published In

Management Science

DOI

ISSN

0025-1909

Publication Date

January 1, 1997

Volume

43

Issue

10

Start / End Page

1401 / 1419

Related Subject Headings

  • Operations Research
  • 46 Information and computing sciences
  • 38 Economics
  • 35 Commerce, management, tourism and services
  • 15 Commerce, Management, Tourism and Services
  • 08 Information and Computing Sciences
 

Citation

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Desai, P. S. (1997). Advertising fee in business-format franchising. Management Science, 43(10), 1401–1419. https://doi.org/10.1287/mnsc.43.10.1401
Desai, P. S. “Advertising fee in business-format franchising.” Management Science 43, no. 10 (January 1, 1997): 1401–19. https://doi.org/10.1287/mnsc.43.10.1401.
Desai PS. Advertising fee in business-format franchising. Management Science. 1997 Jan 1;43(10):1401–19.
Desai, P. S. “Advertising fee in business-format franchising.” Management Science, vol. 43, no. 10, Jan. 1997, pp. 1401–19. Scopus, doi:10.1287/mnsc.43.10.1401.
Desai PS. Advertising fee in business-format franchising. Management Science. 1997 Jan 1;43(10):1401–1419.

Published In

Management Science

DOI

ISSN

0025-1909

Publication Date

January 1, 1997

Volume

43

Issue

10

Start / End Page

1401 / 1419

Related Subject Headings

  • Operations Research
  • 46 Information and computing sciences
  • 38 Economics
  • 35 Commerce, management, tourism and services
  • 15 Commerce, Management, Tourism and Services
  • 08 Information and Computing Sciences