9781118041581

Summary 53

of burgers sold rather than microchips.) We observe that the revenue-maximizing output

is well past the franchisee’s optimal (i.e., profit-maximizing) output. The range of eco-

nomic conflict occurs between these two outputs—the franchisee unwilling to budge from

the lower output and the parent pushing for the higher output.

The same point can be made by appealing to the forces of MR and MC. The parent

always wants to increase revenue, even if doing so means extra costs to the franchisee.

Thus, the parent wishes to push output to the point where MR is zero. (Make sure you

understand why.) But the franchisee prefers to limit output to the point where extra costs

match extra revenues, MR MC. Past this point, the extra revenues are not worth the

extra costs: MR MC. In Figure 2.8b, the franchisee’s preferred output occurs where

MR MC and the parent’s occurs at the larger output where MR 0.

The conflict in objectives explains each of the various disputes. In the parent com-

pany’s view, all its preferred policies—longer operating hours, more order lines, remodel-

ing, lower prices—are revenue increasing. In each case, however, the individual franchisee

resists the move because the extra cost of the change would exceed the extra revenue. From

its point of view (the bottom line), none of the changes would be profitable.

To this day, conflicts between parent and individual franchisees continue. The

Quiznos sandwich shop chain has experienced repeated franchisee revolts. Dunkin

Donuts franchisees have strongly opposed its parent’s deals to allow Procter & Gamble,

Sara Lee Foods, and Hess gas stations to sell the chain’s branded coffee, reporting that

this has cut into their own stores’ coffee sales. Even McDonald’s Corp., long considered

the gold standard of the franchise business, is feeling the heat. McDonald’s diverse efforts

to increase market share have been fiercely resisted by a number of franchisees. What’s

good for the parent’s market share and revenue may not be good for the individual fran-

chisee’s profit. Franchise owners have resisted the company’s efforts to enforce value pric-

ing (i.e., discounting). McDonald’s strategy of accelerating the opening of new restaurants

to claim market share means that new outlets inevitably cannibalize sales of existing stores.

Such conflicts are always just below the surface. Recently, a group of Burger King fran-

chisees sued the franchiser to stop imposing a $1 value price for a double cheeseburger,

a promotion on which franchisees claimed to be losing money.

SUMMARY

Decision-Making Principles

1. The fundamental decision problem of the firm is to determine the
   profit-maximizing price and output for the good or service it sells.


2. The firm’s profit from any decision is the difference between predicted
   revenues and costs. Increasing output and sales will increase profit, as
   long as the extra revenue gained exceeds the extra cost incurred.
   Conversely, the firm will profit by cutting output if the cost saved exceeds
   the revenue given up.

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