Franchisees and Pricing

A few years ago many Burger King franchisees were losing money from specific menu items that Burger King headquarters were requiring the franchisees to sell for $1.  This is an interesting pricing issue.  If the franchisor (BK Corp.) is able to set the price that the franchisee (BK) sells at then the franchisor has an incentive to set prices lower than the franchisee, since the franchisor generates revenue from selling the product to the franchisees and the lower the price the more final customers will purchase.  If the franchisee is restrained in setting the final price, they will make less profit than when they have the ability to set their own price.  Hence the pricing incentives for the two are different as seen in the article linked at the beginning of this blog.