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In marketing contracts between powerful firms and weak firms, it can be mutually beneficial for the powerful firm to “tie its own hands” at the initial contract by putting in place safeguards to protect the weak firm in the ongoing relationship.
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Carson, Stephen J and Mrinal Ghosh (2019), “An Integrated Power and Efficiency Model of Contractual Channel Governance: Theory and Empirical Evidence,” Journal of Marketing, 83 (4), 101-120.
Power theories (e.g., social exchange theory, resource dependence theory) and efficiency theories (e.g., transaction cost analysis) offer very different perspectives on the design of contractual governance in marketing channels. Whereas power theory suggests that governance will reflect the preferences of powerful firms, efficiency theories argue that governance will maximize joint value. In this research, the authors provide an integrative framework that reconciles power and efficiency perspectives in the context of contractual marketing channel relationships. This framework discriminates between two methods of exercising power: ex ante (through a highly specified, efficient contract that rewards the powerful firm through the price mechanism while providing strong safeguards for the weak firm) or ex post (through a loosely specified, inefficient contract that allows the powerful firm to exploit its power during renegotiations). The authors argue that power will cause channel governance to deviate from the efficient choice, but only to the extent that the powerful firm cannot price out (i.e., extract) the value it offers to the weaker firm ex ante. As exchange conditions become more uncertain, power will demonstrate stronger effects on governance. This theory is supported with data from studies on contractual research-and-development relationships and procurement contracts for customized industrial products.
Special thanks to Kelley Gullo and Holly Howe, Ph.D. candidates at Duke University, for their support in working with authors on submissions to this program.
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