Pricing Variation Within Dual-Distribution Chains: The Different Implications of Externalities and Signaling for High- and Low-Quality Brands

Abstract

Within many of the multioutlet branded chains that dominate the retail and services landscape, the organizational form (e.g., company management, franchising) used to manage an outlet varies from site to site, as do the prices charged at those sites. I propose that organizational form and prices may be systematically related as a result of brand externalities. In particular, I develop logic that the relevant form of externality should differ for upper quality tier brands and lower tier brands. Using panel data on price and organizational form from more than 6,700 branded U.S. hotels affiliated with 40 “dual-distribution” brands—those brands that simultaneously company manage and franchise individual outlets—I find that, consistent with the brand externality arguments, company-managed locations have higher prices within high-quality chains, whereas franchisees price higher in the lower tiers. This paper was accepted by Bruno Cassiman, business strategy.

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