Manufacturer–retailer supply chain cooperation through franchising: A chance constrained game approach

In the literature of manufacturer–retailer supply chains, the focus of research is on a relationship in which a manufacturer is the leader and retailers are followers. This relationship implies a dominance of the manufacturer over retailers. Recent studies in marketing have shown a shift of retailing power from manufacturers to retailers. Retailers have equal or even greater power than a manufacturer when it comes to retailing. Based on this new market phenomenon, we intend to investigate a special manufacturer–retailer supply chain, i.e., the franchisor–franchisee supply chain. Utilizing chance constrained game theory, we explore the role of franchising efficiency with respect to transactions between a franchisor and a franchisee through fixed lump-sum fees, royalties, wholesale prices and retail prices. Two franchising game models are discussed. In a leader–follower non-cooperative game, the franchisor is assumed to be a leader who first specifies the fixed lump-sum fee, the royalty payment, and the wholesale price. The retailer, as a follower, then decides on the retail price. We then relax the assumption of the retailer's inability to influence the manufacturer's decisions and discuss a cooperative and partnership situation between the franchisor and the franchisee. The Nash bargaining model is utilized to implement profit sharing for the franchisor and the franchisee to achieve their cooperation.