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Price Control In Franchised Chains: The Case Of McDonald's Dollar Menu

Jan 2007
Working Paper
By  Itai Ater, Oren Rigbi
We present new evidence on the ability of chains to improve control over prices set in their franchised outlets. We construct and analyze panel data of fast food outlets from 1999 and 2006 to quantify price differences between franchised and corporate-owned outlets, and to test whether the introduction of low-priced items is an effective tool to control prices in franchised chains. Our main finding is that since 1999, McDonald's franchisees’ price premium over corporate-owned outlets has fallen by 70%, and that this drop has occurred only in items with good substitutes in the Dollar Menu, introduced by McDonald's in 2002. We also test how competition and repeat customers affect pricing in franchised and corporate-owned outlets. We find that whereas the existence of repeat customers affects prices, competition does not.