Price Formats for Branded Components in Industrial Markets: An Integration of Transaction Cost Economics and the Resource-Based View

Abstract

I n this paper, we propose an approach to show how the capability-based perspective of the resource-based view of the firm can be integrated with the comparative-governance approach of transaction cost economics to shed light on governance issues in interfirm relationships. We argue that transacting parties create value not only through the employment of partner-specific investment and coordination activities but also through the employment of heterogeneous, firm-specific resources that each firm brings to the relationship and that, in turn, governance structures reflect a discriminating alignment with these two distinct forms of value-creating activities and resources. Our thesis is empirically tested in the context of industrial original equipment manufacturers employing branded component contracts with independent component vendors. Specifically, we investigate the conditions under which the price terms for branded components are agreed upon (more fixed) ex ante versus negotiated (more flexible) ex post. Our results offer two insights. First, the chosen governance form reflects a trade-off between safeguarding and adaptation motives even among parties engaged in cooperative relationships. Second, valuable, firm-specific resources that preexist outside of the exchange relationship are at stake in these cooperative yet contractually incomplete relationships. They, together with relationship-specific investments and activities, have a significant impact on governance design.

Institutionalization Strategy Enhancing Firm Resources: Isomorphism from Firms and Its Strategic Implications

“…Transaction cost Since Coase (1937) recognized that certain types of cost may occur due to market exchanges, scholars in this research stream have explored the transaction cost of organizations (Lo, Frias, & Ghosh, 2011). Transaction cost theory has been used to explain multiple firm behaviors, including strategic alliance (Parkhe, 1993), bargaining power (Argyres & Liebeskind, 1999), the survival of joint ventures (Pearce, 1997), and multinational strategy (Rugman & Verbeke, 1992).…”

Organizational Economics of Capability and Heterogeneity

“…" (italics in original). The paper by Lo et al (2012) pursues this approach to combining capabilities considerations with transaction cost economics. They find, for example, that the strength of firms' preexisting capabilities affects governance-in this case, the pricing formats in the contracts they study.…”

'Strategizing Calculus' in Industrial Procurement Contracts: Safeguarding Pre-Existing Resources versus Creating Value

“…The predominant focus of this line of research, however, has been on how optimal governance arrangements incentivize value-generating activities within the relationship (e.g., Anderson and Weitz 1992;Dutta and Weiss 1997;Oxley 1997;Bensaou and Anderson 1999). However, there has been increasing realization that even extra-relational assets and firm-specific endowments like brand strength are at risk in such collaborative ties due to partner opportunism (e.g., Reich and Mankin 1986;Dutta and Weiss 1997;Arruñada and Vázquez 2006;Lo et al 2012;Alcacer and Oxley 2014). Helper and Levine (1992), Argyres (1996), and Ghosh and John (1999) were the first set of theoretical models that suggested how pre-existing, extra-relational resources that are independent of a focal collaborative relationship could be "held up" in such exchanges and how firms might design governance forms to trade-off safeguarding pre-existing assets against value-generation.…”

“…Helper and Levine (1992), Argyres (1996), and Ghosh and John (1999) were the first set of theoretical models that suggested how pre-existing, extra-relational resources that are independent of a focal collaborative relationship could be "held up" in such exchanges and how firms might design governance forms to trade-off safeguarding pre-existing assets against value-generation. Extant empirical work (e.g., Ghosh and John 2005;Lo et al 2012) has shed light on certain aspects of these models. For instance, Lo et al (2012) show that high level of pre-existing resources in contracts for branded components are associated with more fixed price contracts.…”

“…In business-to-business, supply chain, and distribution channel settings, firms often enter into strategic alliances or collaborative ties to offer products or services that are sources of competitive advantage (e.g., Mowry, Oxley, and Silverman 1996;Jap 1999). These value-added products or services are created through investments in partner-specific assets, processes, and routines as well as through information and knowledge sharing (e.g., Powell, Koput, and Smith-Doerr 1996;Khanna, Gulati, and Nohria 1998;Lee 2011) that may leverage an individual firm's pre-existing resources like technological, engineering, and product development skills, brand equity, and channel capabilities (e.g., Moorman and Slotegraff 1999;Dussauge, Garrett, and Mitchell 2000;Lo, Frias, and Ghosh 2012). A vast body of literature, both theoretical (Williamson 1979;Grossman and Hart 1986;Zanarone, Lo, and Madsen 2015) and empirical (e.g., Heide 1994;Reuer and Arino 2007;Schepker et al 2014) has focused on contract design approaches to encourage parties to make efficient, value-enhancing investments.…”