percent of all retail sales in the United States and originate 12 percent of the gross national product, yet the franchise relationship has largely escaped economic analysis. This paper employs recent developments in the modeling of firms and market structures to explain the occurrence of franchising and its distribution among sectors of the economy and to analyze the contractual consequences of profit maximization by the franchisor. The first section characterizes the economic relation involved in franchising and explains why it occurs in certain sectors of the economy. The second analyzes franchisors' use of their market power as an exercise in constrained maximization. The third section considers the franchisor's choice between owned and franchised outlets.
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Caves et al. (1976) studied this question.