Information Asymmetry and Dual Distribution in Franchise Networks

We examine whether a dual distribution system that uses both franchisor-operated and franchisee-operated outlets reduces a franchisor's information disadvantage when contracting with franchisee retailers. Using detailed qualitative and quantitative managerial data, we find persuasive evidence of the strategic use of performance information obtained from franchisor-operated outlets to reduce information asymmetry and enhance contracting efficiency for franchisee-operated outlets. We test whether the proximity of franchisor-operated retail outlets to franchisee-operated retail outlets reduces underpricing of quasi-franchise contracts. Our results accord with the proposition that information asymmetry reduces contracting efficiency and are consistent with our prediction that a manufacturer can reduce intrinsic information asymmetry by maintaining franchisor-operated outlets that are geographically proximate to the franchisee-operated outlets, and that this improves the franchisor's pricing of franchising contracts. We conclude that dual distribution reduces the franchisor's information asymmetry and increases their contract pricing efficiency.