Ram C. Rao and Shubashri Srinivasan
Royalty payments from a franchisee to a franchisor serve as incentive for the franchisor to provide appropriate levels of quality and brand, name investment. However, since they also distort the service provided by the franchisee, we should expect relatively lower royalty rates in franchises that are primarily service-oriented. Casual examination of royalty rates across product-oriented and service-oriented franchises shows that the opposite is true, with service-type franchises enjoying higher royalty rates.