Comments and Questions

Summary of the paperThe authors examine how the distribution of franchise fees and institution quality affect economic growth and welfare in a research and development (R&D)-based growth model including a franchise system. In the real world, the franchise system prevails. For instance, franchised businesses account for a large share of all retail sales in the US, and nominal sales through franchisor outlets have recently grown rapidly, as discussed by the author in the introduction. For this reason, the author addresses the issue of protection of intellectual property rights (IPR) in an R&D-based model by considering the franchise system. The author obtains some results concerning the growth and welfare effects of strengthening IPR protection. Overall evaluationMany studies, as mentioned in the introduction to the paper, have examined the growth and welfare effects of strengthening IPR protection in R&D-based growth models. However, no study has yet examined similar issues in an R&D-based model with a franchised system. As discussed by the author, franchised businesses account for a large share of retail sales in the US. Thus, reexamining these effects in this model will provide a contribution to the literature on IPR protection and economic growth. However, the paper as it stands has one major problem that should first be resolved, as follows. Major CommentThe explanation given in Section 2.2 is somewhat confusing. Above Eq. (1) on p. 4, the author states that each intermediate good firm produces and sells a variety x_j = q x_m + (1–q) x_c to each final good firm. However, in Section 2.1, the author assumes that the inventor can enforce the patent in a court of law and prevent imitation with probability q, and the firm exercising the patent right monopolistically supplies the intermediate goods. Alternatively, with probability (1-q), the inventor cannot enforce the patent in court. In this case, intermediate goods are imitated and imitators supply the goods competitively. Therefore, each intermediate good firm cannot produce the same quantity. This is inconsistent with the earlier description. The author needs to clarify why each intermediate good firm produces the same amount, x_i, if this derivation is indeed correct. Otherwise, the author needs to modify the derivation hereafter under the correct setting.In addition, if intermediate goods are protected with probability q and are imitated with probability (1-q), the paper has another problem. Firms that produce protected intermediate goods can bargain with final good firms and construct a franchise contract. However the intermediate goods that cannot be protected by patents are supplied competitively by many imitators and thus a bargain between the intermediate good and final good firms cannot be made. The other comments1. Almost the entire model is the same as in Wang et al. (2010), except the point that in the present paper IPR protection is imperfect. Almost all of the explanations given for the model setting are also almost identical to those in Wang et al. (2010). For this reason, the author should remove or at least shorten these parts of the paper to avoid excessive repetition of this earlier work.2. Goh and Olivier (2003) examined the welfare effect of strengthening patent protection in an R&D-based growth model where a variety of final goods are produced using a variety of intermediate goods. Because they address a similar issue in a comparable model, the author should discuss any differences between Goh and Olivier (2003) and the present study. ReferenceGoh, A-T., and J. Olivier, (2003) “Optimal Patent Protection in a Two-Sector Economy,” International Economic Review, 43, 1191-1214.Wang, V., C.H. Lai, L.S. Lee, and S.W. Hu, (2010) “Franchise Fee, Contract Bargaining, and Economic Growth,” Economics of Innovation and New Technology, 19, 539-552.