Policy Seminars -- Winter 2008
| Speaker: Itai Ater -- Stanford University |
| Topic: Price Advertising in Franchised Chains: The Case of McDonald's Dollar Menu |
| Date/Place/Time: January 30,
2008 / UCLA Anderson School -- Entrepreneurs Hall C315 / 10:15 A.M. to 11:45 A.M. |
| Abstract: We highlight the role of advertising as a mechanism for alleviating organizational agency problems. Through advertising, the chain informs consumers about a desired behavior for franchisees. Consequently, franchisees find it optimal to adopt the chain's desired behavior. We demonstrate this idea using McDonald's Dollar Menu advertising campaign in 2002. We exploit McDonald's dual organizational structure, operating both corporate-owned and franchised restaurants to test changes in the prices of advertised and non-advertised items. We find that price differences between franchised and corporate-owned outlets have decreased substantially only for items with good substitutes in the Dollar Menu. Second, the change in the price differential is larger in outlets located near highways, where the incentive of franchisees to free-ride on the chain's reputation is large. These findings suggest that the Dollar Menu advertising campaign has improved McDonald's control over its franchisees, and that, more generally, advertising could play an important role within the organization. |
| Links to papers: Click here for paper |