Introduction

A recent bestseller by Naomi Klein (No Logo) argued against the invasion of brand names in our everyday lives. Brands are everywhere, but there are most likely economic reasons for this. Brand names provide consumers with information and reduce information and search costs. As a traveler, I know that McDonald's hamburgers will taste more or less the same in Paris and Los Banos (Philippines). At the same time, in developed countries, firms are increasingly focussing on channeling branded products to consumers, especially in sectors where competitive advantage depends on organizational approaches.

This chapter focuses on the provision of branded products by retailers. More specifically, it studies relations between retailers and producers when several retailers are part of a shared retail chain. When talking about a retail chain we include several types of retail distribution systems where trademarks are prominent. The rest of the paper focusses mainly on franchising, for two reasons. First, most of the empirical literature on contracting in distribution channels concerns franchising. Insights gleaned from studies on franchised chains enable researchers to develop a better understanding of how firms organize their activities much more generally, both in-house and across firms. Second, franchising agreements include several contractual provisions, sometimes called “vertical restraints” (e.g. selective or exclusive distribution), which may be used to analyze the rationale behind contractual design.

This chapter adopts a new institutional economics (NIE) approach to the study of retail chains. It explores the existence and role of franchising as an efficient device.