Signaling and rent extraction vis contract proposals in franchising

We study the role of two-part transfer schemes as signals of consumer demand from a privately informed franchisor to an uninformed franchisee. Distortions in the wholesale price and the up-front franchise fee offered by the high demand franchisor may possibly separate the different types of franchisors. However, franchise fees may be independent of private information, even in a separating equilibrium. Further, pooling equilibria survive for certain specifications of demand and prior probability distribtutions. Finally, the extraction of downstream rents by the franchisor may be incomplete. We trace some empirical implications of these results.