Choice of subcontractor in markets with asymmetric information: reputation and price effects

Abstract

Purpose -Buyers assessing bids from suppliers of experience services face both an adverse selection and a potential moral hazard problem. The purpose of this study is to examine (1) the relative importance of various signals of supplier reputation conveying information about unobserved supplier quality, which is important for identifying the best tender; and whether price is contingent on (2) supplier reputation, and (3) on buyer's quality sensitiveness in a competitive bidding situation.Design/methodology/approach -This study builds on a conjoint experiment where 19 contractors consider alternative scenarios representing tenders from subcontractors of plumbing services. In the scenarios the subcontractors differ on their reputation and price variables, while the contractors differ in their quality sensitiveness. Multiple regressions analyzes the contingent price effects.Findings -Although low price is generally important for subcontractor selection, quality sensitive buyers are willing to pay subcontractors a price premium to prevent quality debasement. On the other hand, despite the combined significance of supplier reputation on choice, buyers are not willing to pay price premiums to suppliers with a quality reputation.Research limitations/implications -Conjoint studies produce multiple cases but the underlying sample is limited. Therefore, this study should be regarded as preliminary and a basis for further validation on larger samples.Practical implications -In competitive bidding situations, suppliers with strong quality reputations may benefit most by low price offers. Thus, suppliers with a strong reputation should achieve profitability through a volume premium rather than a price premium effect. Suppliers opting for price premiums should target the quality sensitive segment of the market.Originality/value -In contrast to previous findings in B2B brand equity studies, but in line with findings in information economics, this study suggests that suppliers with a reputation for quality will not receive price premiums. The results indicate that in bidding contexts in B2B markets, the reputation variables may enhance rather than reduce buyers' price sensitivity, because supplier reputation increases low price credibility.

The Ineffectiveness of Corporate Brand Investments in Creating Price Premiums

“…This argument parallels previous findings, buyers would not pay price premiums to sellers having invested in a corporate quality reputation (e.g., Andrews and Benzing 2007;Biong 2013;Png and Reitmann 1995). Still, suppliers with corporate brand investments may try to charge price premiums in their market offerings.…”

“…B2B brand management studies suggest corporate brand investments to increase suppliers' ability to charge price premiums (e.g., Bendixen, Bukasa, and Abratt 2004;Persson 2010). In contrast, empirical information economics studies in B2B and B2C contexts show that buyers would pay lower or none price premiums to suppliers with a credible corporate quality reputation (Andrews and Benzing 2007;Biong 2013;Png and Reitman 1995;Rao and Bergen 1992). These ambiguous findings may have serious implications for firms' pricing and reputation-building strategies.…”

“…Uncertainty about supplier quality characterizes a variety of goods and services in businessto-business and consumer markets (e.g., Biong 2013;Erdem, Swait, and Valenzuela 2006;Homburg, Klarmann, and Schmitt 2010;Mishra, Heide, and Cort 1998;Shapiro 1982). For example, buyers of B2B services, such as marketing research, may have difficulties in evaluating providers and the value of their services (Wuyts, Verhoef, and Prins 2009).…”

“…Second, assuming that B2B purchasing managers are both price and quality sensitive as the extant literature suggests (Biong 2013;Darvish, Yasaei, and Saeedi 2009;Håkansson and Wootz 1975;Wuyts, Verhoef, and Prins 2009), and assuming that sellers adapt their pricing strategies to their perceptions of buyer behavior, we examine how sellers' price premiums are functions of purchasers' quality-sensitiveness and willingness to punish quality deception, as perceived by the seller. More specifically, we argue that sellers' price premiums will decrease with their perceptions of buyers' increasing willingness to punish quality deceptions and to increase with their perceptions of buyers' increasing quality-sensitiveness (Rao 1993).…”

“…For example, buyers of B2B services, such as marketing research, may have difficulties in evaluating providers and the value of their services (Wuyts, Verhoef, and Prins 2009). Poor plumbing may not be discovered before a building suffers from serious leakage damages (Biong 2013).…”