Supplier Performance in Vertical Alliances: The Effects of Self-Enforcing Agreements and Enforceable Contracts

The paper examines the significance of enforceability and adaptability in governing vertical alliances and their performance ramifications for suppliers. Literature on supplier relations suggests that suppliers are skeptical of close ties with their buyers (Helper 1991, Helper and Sako 1995). Such skepticism persists in spite of the fact that buyers are writing longer (enforceable) contracts with fewer suppliers. In this context, the paper develops a transaction cost economics (TCE)-based model that distinguishes between the verifiable and nonverifiable aspects of governance attributes (of safeguards, incentive intensity, and adaptability) in explaining supplier performance variations. The paper argues that the following factors prove valuable for suppliers: (1) the adaptive and collaborative orientation fostered by the original equipment manufacturer’s (OEM’s) credible commitment to the exchange and by information sharing on the part of the supplier, (2) the presence of certain nonverifiable safeguards, and (3) the incentives inherent in target pricing. These assertions have been tested using data from the home appliance industry. Results indicate that information sharing together with (1) OEM dependence and (2) target pricing does indeed enhance supplier performance. Also, results suggest that while nonverifiable safeguards can help, verifiable safeguards do not have a positive association with supplier interests. Under certain conditions then, suppliers can venture into closer relationships with buyers and benefit.