The Effect of Contract Regulation on Franchising Questions

The Effect of Contract Regulation on Franchising Questions


Question 1: What was the intent of this research?

This research intends to address two issues concerning franchises that have been ignored in the literature. One of these main issues is the fact that the empirical work in franchise areas has been almost exclusively cross-sectional leading to significant problems of causal inference (Roider, 2012). The second issue is that economists are paying little attention to the legal environment in which franchise contracts are enforced and interpreted. Using a panel of data, the article makes improvements in both areas by employing panel data on the franchise activities of the most famous and largest fast-food chains. This enables them to analyze the impacts of the laws that limit the use of termination clauses in contracts of the franchise.

Question 2: How was the research conducted (method)?

The research was conducted using cross-sectional studies that provided limited data concerning franchising in the fast-food industry. Through panel data, the researchers examine the impacts of the termination restriction law that was enacted in Iowa in 1992 and the eradication of similar law in 1998 in the Columbia District (Roider, 2012). Panel data them an opportunity of parsing out the idiosyncratic differences throughout the states. To make statistical inferences, the researchers explored new methods since their analyses focused on extremely limited variation in the legal variation that provided their statistical identification. While the cross-sectional studies provided significant information needed for their research, they, however, had many limitations resulting from variable biases that were omitted.

Question 3: What was the sample for this research, and how was it determined?

The sample of this research incorporates two significant laws: the termination restriction law and of Iowa and a similar law in the District of Columbia. The samples were determined by comparing the extent of franchising in different states that restricted termination and those that failed to restrict termination. Researchers found out that there was a higher share in non-restricted states compared to restricted states through the use of cross-sectional studies (Roider, 2012). To address each question’s efficiency, the researchers analyzed the industries separately to primarily serve the non-repeat customers. They found the effects to be more pronounced. In this case, cross-sectional studies were mostly used to determine the samples provided.

Question 4: What were the conclusions of the article?

This article provides several conclusions. One major conclusion is that the termination laws vary in their effects according to different states depending on the efforts made by parties in contracting around the law. According to the researchers, the Iowa termination restriction was significantly negative in terms of both economic and statistical importance particularly on franchising (Roider, 2012). However, the D.C law was weaker and did not have a clear effect. This was consistent with the idea of contractual regulation biting only when it becomes challenging to contract around them. This point has been ignored by much franchising literature even though it seems to be trivial. The researchers believe that they have made substantive and methodological improvements in analyzing the franchising field even though their data do not provide them an opportunity to investigate the economic efficiency of termination clauses.

Question 5: Is this research actionable? In other words, could it be put into use in any practical way in a Franchisee or Franchisor business?

This research can be put into use in many practical ways in a franchisee business. Franchising is critical and is becoming the most studied organization form. This research can be used to analyze how incentives and contracts are used in reducing agency and transaction costs and the general nature of inter versus interim contracting (Roider, 2012). The insights provided in this research can also help in explaining how franchising exists as a business form. The two specific laws examined in this research also illustrate how the regulation of contractual relationships between franchisees and franchisors can significantly affect how businesses are organized and their contracts.

Question 6: What in this article did you find most important?

The most important aspect of this article is the information provided concerning the termination clauses found in franchise contacts. According to the researchers, franchise contacts lead to opportunism problems (Roider, 2012). On the part of a particular franchisee, poor performance leads to negative externality borne by franchisees and the franchisor. This leads to the degradation of trademark value. The researchers highlight that the broad termination rights can create problems of opportunism on the part of the franchisor. Therefore, franchisors must engage in cream-skimming to terminate the contracts especially when a particular franchise proves to be profitable. This article provides adequate information concerning franchising and critical concerns that need to be paid attention to business.

Question 7: What in this article did you find least important?

What I found least important in this article is are the worries that researchers have in their research. The researchers state that they find that their data does not allow them to examine the economic efficiency of termination clauses (Roider, 2012). As experts in their field, they must examine every method used to get accurate and significant results and limit the study limitations. I also find the results on the negative effects of the restriction laws in Iowa and D.C to be least important since they do not address the most critical issues. What the researchers should focus more on, are the significant steps that can be taken to ensure that the regulation of termination clauses does not affect franchising.



















Roider, A. (2012). The Effect of Contract Regulation on Franchising. Journal of Institutional and Theoretical Economics JITE, 168(1), 58-61.


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