An article in The Wall Street Journal reported that large hotel chains, such as Marriott, are tending to reduce the number of hotels that they franchise to outside owners and increase the number the chain owns and manages itself. Some chains are requiring private owners or franchisees to make upgrades in their hotels, but they are having a difficult time enforcing the policy. Marriott says this upgrading is important because “we’ve built our name on quality.”

a. What type of agency problem is involved here?
b. Why would Marriott worry about the quality of hotels it doesn't own but franchises?
c. Why would a chain such as Marriott tend to own its hotels in resort areas, such as national parks, where there is little repeat business, and franchise in downtown areas, where there is a lot of repeat business? Think of the reputation effect and the incentive of franchises to maintain quality.

a. The type of agency problem involved here is the Principal-Agent Problem. In this case, Marriott is the principal, and the private owners/franchisees operating hotels under the Marriott brand are the agents. The owners/franchisees may not have the same incentives as Marriott to maintain or upgrade the quality of the hotels.

b. Marriott would worry about the quality of hotels it doesn't own but franchises because the overall reputation of the Marriott brand is at stake. If a franchised hotel has poor quality or lacks essential upgrades, it could reflect negatively on the Marriott brand as a whole, potentially leading to a decrease in customer trust and loyalty. Marriott has built its name on quality, and maintaining consistent quality standards across all hotels is crucial for preserving its reputation and attracting customers.

c. Marriott tends to own hotels in resort areas with little repeat business because these locations are often associated with luxury and exclusivity. By directly owning and managing hotels in such areas, Marriott can ensure that the quality and service meet their high standards, which can help enhance their reputation as a premium brand. On the other hand, in downtown areas with a lot of repeat business, franchising allows Marriott to leverage the local expertise and resources of private owners/franchisees who have a vested interest in maintaining the quality of the hotel. Franchisees have a financial incentive to maintain the reputation of the Marriott brand as it directly affects their own business success. This reputation effect creates a mechanism for maintaining quality through the alignment of incentives between Marriott and the franchisees.

a. The type of agency problem involved here is the principal-agent problem. The principal in this case is Marriott, the large hotel chain, and the agents are the private owners and franchisees who operate the hotels on behalf of Marriott.

b. Marriott would worry about the quality of hotels it doesn't own but franchises because maintaining a consistent level of quality is crucial for its brand reputation. As stated in the article, Marriott has built its name on quality, and any decline in the quality of its franchised hotels could negatively impact its brand image and customer satisfaction. Therefore, Marriott has an incentive to ensure that its franchisees meet certain standards and maintain the quality expected by its customers.

c. A chain like Marriott may tend to own its hotels in resort areas, such as national parks, because there is little repeat business in these areas. Owning the hotels allows Marriott to have direct control over the quality and services provided, ensuring a consistent customer experience. In these locations, where customers may not return frequently, maintaining a high standard of quality is crucial to attract new customers and maintain a positive brand reputation.

On the other hand, franchising in downtown areas, where there is a lot of repeat business, allows Marriott to benefit from the reputation effect. If a franchisee maintains high quality and provides excellent service, it can enhance the overall reputation of the Marriott brand. Franchisees have a direct incentive to maintain quality in downtown areas because repeat business relies heavily on customer satisfaction and positive word-of-mouth. By franchising in these areas, Marriott can leverage the incentives of franchisees to maintain quality while expanding its presence and market share.