From Vendors to Partners: Information Technology and IncompleteContracts in Buyer-Supplier Relationships
As search costs and other coordination costs decline, theory predictsthat firms should optimally increase the number of suppliers with whichthey do business. Despite recent declines in these costs due toinformation technology, there is little evidence of an increase in thenumber of suppliers used. On the contrary, in many industries, firms areworking with fewer suppliers. This suggests that other forces must beaccounted for in a more complete model of buyer supplier relationships.This article uses the theory of incomplete contracts to illustrate thatincentive considerations can motivate a buyer to limit the number ofemployed suppliers. To induce suppliers to make investments that cannotbe specified and enforced in a satisfactory manner via contractualmechanism, the buyer must commit not to expropriate the ex post surplusfrom such investments. Under reasonable bargaining mechanisms, such acommitment will be more credible if the buyer can choose from feweralternative suppliers. Information technology increases the importanceof noncontractible investments by suppliers, such as quality,responsiveness, and innovation; it is shown that when such investmentsare particularly important, firms will employ fewer suppliers, and thiswill be true even when search and transaction costs are very low.
Year of publication: |
1993-06
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Authors: | Bakos, Yannis ; Brynjolfsson, Erik |
Publisher: |
Journal of Organizational Computing |
Saved in:
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