Aggregate versus product-specific pricing: Implications for franchise and traditional channels

Franchisors often charge a common franchise fee and royalty on all the products sold or serviced by their franchisees. Since the potential demand for each product may be different, a product specific pricing scheme may be optimal. Hence, the common strategy of aggregate pricing appears to be a puzzling practice. However, we show that under certain conditions the aggregate pricing scheme improves channel coordination of retail prices and local services, and improves the total channel profit and the franchisor's profit. In order to highlight the important role of franchise fee, we also consider a traditional channel in which the manufacturer does not have enough market power to charge a positive franchise fee. We consider two pricing arrangements: quantity discount schedules and slotting allowances. We find that for a manufacturer using quantity discount schedules, aggregate pricing is (weakly) worse than product-specific pricing. If the retailers have enough power to extract all the surplus from the manufacturer through slotting allowances, then the manufacturer is indifferent between using product-specific and aggregate pricing. © 1996 New York University. All rights of reproduction in any form reserved.

Duke Scholars

Author Preyas S. Desai Fuqua School of Business