Maintaining quality standards in franchise chains

The present paper identifies those characteristics of the markets served by a franchise chain which determine the relative incentives of the owner of the chain to monitor the behavior of individual franchisees. It finds that the owner has greater incentives to monitor the outlets that serve the relatively smaller markets and those that are subject to greater fluctuations in the state of the demand confronting them. The paper finds that the extent of competition with other chains has an ambiguous effect on the incentives to monitor the franchisees.