Multi-unit ownership and market power: A study of the lodging industry in Texas

Abstract

As franchisees in the retail and service industries become experienced and acquire local market knowledge, they are likely to own multiple franchised units. Given non- (or weak) exclusive clauses in franchising contracts or industry norms, some of these multi-unit owners are affiliated with multiple franchisors. Agency and transaction cost theories, the classic theoretical framework to analyze franchising, cannot explain this type of multi-franchisor affiliation because this type of ownership would create incentive problems across franchisors. Conversely, this paper investigates whether this type of the multi-unit ownership can be explained by the exercise of market power by these franchisees. We test this hypothesis in geographically clustered markets (hotels near the interstate highway exits), where multi-unit ownership is common. We first show that multi-unit owners affiliated with multiple franchisors charge higher prices than other franchisors. Then, in our main analysis, we show that one explanation for this pattern is the existence of market power: Without multi-unit ownership, prices at these hotels would decrease by 9%, on average (and market-level volume sales would increase by 7.52%). These results help explain why franchisors might be willing to engage in franchising contracts with franchisees that operate units associated with different franchisors.