In a recently published paper, my co-authors and I propose an approach for a joint examination of competitive and cooperative (i.e. co-opetitive) relationship between a buyer and a supplier. Specifically, the paper considers the scenario in which the buyer and the supplier invest in strategic capabilities to increase their relative bargaining power. The article examines how dynamic investments in strategic assets are influenced by the locus of bargaining power and by the underlying context (synergistic vs. adversarial) of the interfirm relationship. The dynamic evolution of bargaining power is also examined. A dynamic game model is considered to examine the evolution of investment strategies in critical resources and to investigate the issues of bargaining power in a buyer-supplier dyad. Equilibrium expressions for the investment strategies of the buyer and the supplier are presented and their implications for buyer-supplier relationships are examined. The behavioral experiment complements the analytical model and examines the correspondence between “optimal” behavior suggested by the analytical model and the boundedly rational behavior of decision makers in an experimental context. The results from the model and behavioral experiments suggest that the strategies are a function of the risk adjusted returns obtained from investments. The experiment shows that in a synergistic relational context when the buyer maintains bargaining power, the investment shifts of the buyer and the supplier accord well with theoretical predictions. In an adversarial relational context, the results of the experimental study do not correspond well with that predicted by the theoretical model.
The results of the study motivate firms to develop specialized or unique resources in conjunction with the assets of a collaborating partner. The expressions for the equilibrium investments of the buyer and the supplier suggest that, along with the risk adjusted returns from investments, the investments of the exchange partners are also a function of correlated gain processes representing the degree of collaboration and the bargaining power. The correlation coefficient characterizes asset inter-connectedness (initial relation-specific investments create conditions for subsequent specialized investments) and resource indivisibility (partners combine resources or jointly develop capabilities so that the resulting resources are both idiosyncratic and indivisible). The results suggest the importance of high correlation in the investments made by the buyer and the supplier.
The study finds that competitive advantage results when firms critically examine both risk adjusted returns and synergistic investment with network partners. Appropriate incentive mechanisms, such as formal equity arrangements or informal norms of reciprocity, are critical for knowledge-sharing. As an example, Toyota has developed a number of practices that foster knowledge-transfers with suppliers. An alternative approach to gain relational rents by facilitating high correlation between the investment patterns of the buyer and the supplier is to leverage the complementary resource endowments of the collaborating partner.
It is to be noted that the correlation between the gain processes of the buyer and supplier firm can be influenced by managerial actions. Specifically, when the buyer has bargaining power, incentives can be built into purchase contracts to induce suppliers to consider synergistic and complementary innovation investments. For example, gain sharing agreements in partnership agreements between buyer and supplier are meant to accomplish this.
The theoretical and experimental investigation in this paper considers self-enforcing governance mechanisms within an inter-organizational context that are fostered by a bargaining power based informal safeguard. The study extends our present understanding of strategic issues associated with the buyer-supplier relationship by providing insights regarding resource investments to develop core competence, synergistic gain sharing and bargaining power issues.
Source: Nair, A., Narasimhan, R., and Bendoly, E. 2011. Coopetitive Buyer-Supplier Relationship: An Investigation of Bargaining Power, Relational Context, and Investment Strategies. Decision Sciences, 42(1): 93-127.