Nancy A. Lutz Publications

In this paper we offer an explanation for the practice of dual distribution. the simultaneous use of franchises and company owned outlets for distributing new products. Our explanation rests on the observation that franchisors often acquire private information, not available to franchisees, on product demand through marketing efforts. Under this assumption of asymmetric information, we show that a franchisor will use both direct ownership as well as the franchise contract to convey information about a new product. This explanation for dual distribution relies neither on capital market imperfections nor upon location-specific factors, in contrast to alternative explanations advanced in the literature Testable implications of the signaling model are discussed.

Keywords: Franchises, corporations, marketing, private information

JEL Classification: L11, L14, L52

We consider the provision of an optimal warranty in a continuous-time model with two-sided moral hazard. The optimal warranty must balance the producer’s durability incentive and the buyer’s maintenance incentive. Too little warranty protection gives the producer too much incentive to produce low durability, while too much warranty protection gives the consumer too much incentive to neglect maintenance. The derived optimal warranty is a “block warranty” that is high for an initial block of time and zero thereafter. The first-best would be available under a very high warranty for a very short time interval, except for the incentive this would create for the consumer to abuse the product to collect the warranty.

Keywords: Warranties, moral hazard, incentives, product quality

JEL Classification: 611, 514, 026, 022