- SCU Business Home
- About LSB
- Exec Education
- News & Events
Departmental Research Series : Marketing: Desmond Lo : Leavey School of Business
11:30 AM to 1:00 PM
The Marketing Department would like to invite you to a seminar by our very own colleague Desmond Lo on March 3, in Lucas 125. Please mark your calendar!
Title: Safeguarding Customer Strength through Contract Design: Theory and Evidence
Desmond Lo (Santa Clara University), Giorgio Zanarone (CUNEF, Spain), Mrinal Ghosh (University of Arizona)
Abstract: Exchange partners entering into collaborative business relationships seek to balance the potential net productive gains from these relationships with the potential hazards posed by these relationships to their pre-existing assets and capabilities. Extant work in transaction cost economics and incomplete contracts, while focusing on designing “efficient” governance forms that support productivity gains within a relationship (e.g., through incentivizing dedicated investments), have principally ignored the interaction between governance design and the motivation to safeguard extra-relational pre-existing assets and capabilities. In the tradition of the incomplete contracting approach, we develop a model that shows how OEM manufacturers can protect their pre-existing assets/capabilities through designing supplier-side contracts that dis-incentivize the supplier from over-investing, ex-ante, in activities that may facilitate appropriation of the buyer’s pre-existing assets ex post. We then take some key predictions from the model to data on procurement contracts between OEM manufacturers and their component suppliers. Consistent with theory results show that OEMs tend to use closed-price contracts, rather than open-price contracts, when their pre-existing brand equity is high. In addition, we also find that the use of closed-price contracts suppresses the supplier’s investments in dedicated assets reducing the potential gains that could be accrued to the OEM’s end products. Our work provides the first formal rationale and evidence on how parties, cognizant of the dark side of relationships, strategically trade-off between pre-existing capabilities and productivity gains in a relationship. The authors conclude with the theoretical and managerial implications of their study.
Business School Dean's Office
Marketing DepartmentTel 408-554-4580