Bargaining, risk and franchising coordination

This article presents a model for analysing the impact of compensation schemes on behaviours of manufacturer and a retailer in a franchising channel. Franchising compensation schemes characterized by the fixed lump sum fees and royalties are discussed by utilizing risk analysis, cross-constrained game theory and bargaining theory. This article explores coordinating relationships between the franchiser and the franchisee. It is demonstrated that the franchisee’s risk aversion plays an important role in the franchising coordination. The present analyses show that the channel coordination can be achieved utilizing well-known bargaining models. A numerical example is provided to illustrate the theoretical findings.