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 known as the principal-agent problem. In this case, Marriott (the principal) entrusts its hotels to private owners or franchisees (the agents) who are responsible for managing and operating the hotels. However, there is a conflict of interest as the agents may not always prioritize the same goals and objectives as the principal.
b. Marriott would be concerned about the quality of hotels it doesn't own but franchises because its brand reputation is directly linked to the overall customer experience and satisfaction. If hotels franchised by Marriott fail to meet customer expectations and experience quality issues, it could ultimately tarnish the reputation of the Marriott brand as a whole. Therefore, Marriott has a vested interest in ensuring that the quality standards are consistently maintained across all hotels, regardless of ownership.
c. The reason why chains such as Marriott tend to own their hotels in resort areas, such as national parks, and franchise in downtown areas has to do with the reputation effect and the incentives for maintaining quality. In resort areas, there is often a higher emphasis on the overall customer experience due to the significance of attracting tourists. By owning and managing the hotels in these locations, Marriott can directly control and maintain the quality standards to ensure a positive reputation and attract more guests.
On the other hand, in downtown areas, there tends to be a lot of repeat business from corporate travelers or regular visitors. Franchising in these locations allows Marriott to leverage the reputation effect. By carefully selecting franchisees who are aligned with Marriott's standards and providing them with the necessary guidelines and support, Marriott can benefit from the incentives of the franchisees to maintain quality. Franchisees have a direct interest in upholding the Marriott brand reputation to attract repeat business and maintain customer loyalty.