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Job market paper

The Effect of Franchising on Store Performance: Evidence from an Ownership Change

There is a substantial literature predicting that a franchisee-owned store will generate higher profits than a franchisor-owned store, all else equal. However, attempts to estimate the effect of franchising on store performance have been hindered by an important selection issue: store ownership is endogenous and franchisors may choose to own stores in more lucrative locations. I overcome this issue by using a 2007 corporate sale which resulted in all franchisor-owned Applebee's stores in Texas being sold to franchisees as a source of exogenous variation. While I do not observe store profits, Texas makes store-level alcohol sales data available for all bars and restaurants which have a liquor license; I use alcohol revenues as a proxy for store performance. I first find evidence that both observable and unobservable location-level factors were important in Applebee's decision to own or franchise a store. I next create a structural demand model which uses consumer and store locations to predict alcohol sales for all liquor-selling bars and restaurants in Texas over a 10 year period. Using this model, I find that franchising an Applebee's store increases its alcohol revenues by 7%. I also find that franchising a store produces a consumer utility gain comparable to a 2.8 mile reduction in distance from the individual's home to the store.


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