Franchise

Abstract

Since the second half of the twentieth century, the variations in the exchange system of goods and services have allowed the expansion of integrated distribution networks, based on franchise or other distribution agreements. Franchise offers specific benefits to the firms, reducing transaction costs. Manufacturers and suppliers may have access to new markets, raising capital, sharing risks and saving costs, but maintaining the control of the franchisees’ behaviour through the terms of the contract. Franchising is also attractive to franchisees, because of the backing of a successful and recognized system and the ongoing support of the brand to the entrepreneur. However, certain practices, like resale maintenance or price discrimination, territorial restrictions or refusal to supply (among others) may restrict competition among firms by establishing barriers to entry, and consequently they have been controlled by antitrust law. In the internal relationship, the unequal allocation of rights, with the attribution of broad powers to franchisors, including termination at will, favours the opportunistic behaviour of both parties. The legal approach has considered the vulnerability of the franchisee and the unequal bargaining power between the parties by imposing pre-contractual disclosures rules and regulating the termination. In front of these views, economic analysis has criticised the state interventionism in franchising. Both perspectives, opposite, should be considered in order to have an adequate comprehension of the reality inherent to franchise contracts.