| Abstract: | 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. |
