Franchise Mode: Information Economics Perspective

In the late 1980s, with KFC and Macdonald's entering to China, entrepreneurs and scholars of China were just researching franchise. Though it is not mature, it develops very quickly by the manner of scale, low cost, intelligent. At the same time, more and more entrepreneurs want to enlarge them scale, take up more market share by franchise, and more and more person want to invest and earn money though it. Therefore, we should have a good grasp of franchise.In terms of perfect information and asymmetric information to research franchise, it is the aim of this paper. In perfect information, franchisors control franchisees'economic behavior by contract to achieve the economic effect as company-owned units. Lump-sum franchise fees and royalties on sales can achieve the same price, quantity, and profit as company-owned units. Under the circumstances of perfect information, both management modes get the same outcome. However, under the real economic circumstances——asymmetric information, there are opportunism behaviors between franchisors and franchisees. For example, franchisor's opportunism behaviors are advertisement, tying, encroachment, renewal. Franchisee's opportunism behaviors are quality of goods, effort level, inputs。Under the circumstances of the opportunism behaviors, the outcome of franchise is not same as company-owned units. If we carry out some measures to increase messages of them, it can ease the opportunism behaviors. The main idea of this paper is to analyze the reasons, the effects, and the measures of the opportunism behaviors. And this paper is also background knowledge of microscopic theory about franchise.There are seven chapters. Chapter one introduces the background and meaning of this paper, and many academic research. Chapter two explains the concept, characteristic of contract, and the relationship of franchisor,franchisee and consumer. Chapter three analyses the consistency of franchise and company-owned units. Chapter four and chapter five respectively discuss the moral hazard and adverse selection, and to put forward some measures to ease the opportunism behaviors. Chapter six makes use of methods of this paper to analysis the KFC's economic behavior. Chapter seven states the weak point of paper and give some advices.