Suppose that cupcake company wanted to get out of the business of running stores

Question

Suppose that cupcake company wanted to get out of the business of running stores and therefore sold off all the company-owned stores to franchisees. That means that now ALL stores are franchises. Assuming demand distributions remained the same, how would the number of cupcakes ordered when all stores are franchises compare to when some of the stores are company-owned? A. More cupcakes would be ordered if all stores were franchises B. Less cupcakes would be ordered if all stores were franchises C. The same number of cupcakes would be ordered. It doesn't matter if stores are company-owned or a franchise

Explanation / Answer

The correct answer is option A.

It has been assumed that the demand distributions remained the same when all the stores become franchisees. Franchisees would gain more control over the offers and discounts they can provide to their local consumers and boost sales. Being independent stores, they can respond to the needs of the people in their surrounding areas much more clearly than being under the rules and regulations of the cupcake company.

As they are a franchise, they would not lose the brand value of the company or the quality of their products and would continue to attract the existing as well as the new customers to their stores. Thus there is a strong potential that there would be an increase in the order for cupcakes. This would benefit even the cupcake company as they would gain a share from the pockets of the franchisees and also cut out the running costs.

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