Question

In the following setting of franchise for one and PS for the other retailer, find the profit for all three firms.

(p=240-20, MC=40, franchise fee=1500, profit sharing contract = (retailer: manufacturer)=(40:60)).

Answer 1

For understanding the franchise model we look at the diagram below,

Now given,

P = 240 - 2Q (Assuming you have miswritten Q as 0, in the question above for equation of P) ----(1)

MC = 40

At equilibrium, P = MC

240 -2Q = 40

Q = 100

From equation 1, P = 40

Revenue = P*Q = 40*100 = 4000

Now, as per diagram we see,

Franchisee revenue = Share of profit -Francise fee = 60% of 4000 - 1500 = 900

Franchisor revenue = Share of profit + Franchise fee = 40% of 4000 +1500 = 1600