Question

Many fast food restaurant chains like McDonalds and others have some stores which are directly owned by the company (McDonalds) which hires a manager and staff to manage the restaurants, and some stores that they sell a franchise to an outside company/individual who operates the restaurants and pays the company (McDonalds) a franchise fee and keeps the rest of the profits. The franchise fee will have to be paid no matter what the profits of the restaurant may be.

(a) What is the principal - agent problem in the company owned restaurants? Please explain.

(b) What is the principal – agent problem in the franchised restaurant? Please explain. You may assume that the owner is still McDonalds as McDonalds can cancel the franchise agreement if they want to, in which case the former franchisee will no longer be able to use the McDonalds brand to sell their food.

(c) In which case will the principal-agent problem be more severe? Please explain.

Answer 1

Answer

TRhe principle agent problem arises in business like in this problem where McDonald's employed its manager and staff to run thier restaurant .The principal agent problem here is that the manager and workers who are responsible for day to day running of the company may fail to actually achieve the maximization of profit .Instead of getting higher revenue , they concentrate on getting with worker and enjoying on work .

Answer Now In case of Franchised restaurant , the principal agent problem is of maintaining the quality and standard of the company to protect its legacy in public and delivering the best services .

Answer In part b , the principal agent problem is more severe when it comes to famous food chain company of the world because the branding has high standard and dignity and trust among the customer .It is know for its timely delivery and best food .The principal may not know the agent weaknesses as it rely only on the frnachise fee and revenue .

Have a good day !