Scale, Scope, and Takeovers: Evidence from Franchising

Abstract: We use data on the largest U.S.-based franchised chains, measured by worldwide sales, from 1998 to 2007, to explore scale and scope externalities (or spillovers) "within" and "among" the chains of the same parent company. Because franchised chains are fundamentally single-product or single-concept entities, we can distinguish scale and scope effects much better than has been done in most of the literature to date. We can also identify takeovers much more straightforwardly. After controlling for chain unobserved heterogeneity using fixed effects, we find strong evidence of positive scale effects within a chain, suggesting positive spillovers or network advantages from being large. As for the effect of parent company scope, measured by worldwide sales of other chains owned by the parent in the previous year, we find no effect on chain-level sales per store, but a negative effect on the number of outlets. Our analyses of what occurs upon chain takeovers further support these findings and conclusions. Specifically, we find that takeovers have no effect on sales per unit in the target chain, but that they also have a negative effect on the number of units in that chain in the years that follow. Hence, our findings are consistent with firms engaging in some form of rationalization, or reducing competition among their chains, after taking over other chains.