Edited by Geoffrey M. Hodgson
Chapter 5: Determinants of supplier dependence: an empirical study
Hans Berger, Niels G. Noorderhaven and Bart Nooteboom* INTRODUCTION According to transaction cost economics (TCE), as formulated by Oliver Williamson (1975, 1979, 1985, 1991), the governance of vertical interﬁrm relations is determined predominantly by the degree to which assets are speciﬁc to the transaction relation. In the absence of safeguards, asset speciﬁcity leads to vulnerability to opportunistic rent-seeking by the other party (Klein, et al. 1978). Therefore the alignment of the level of asset speciﬁcity and the conﬁguration of safeguards is important. The basic explanatory scheme of TCE is given in Figure 5.1. ASSET SPECIFICITY SAFEGUARDS Figure 5.1 A simple model based on TCE At low levels of asset speciﬁcity arm’s-length market relations are expected because, in the absence of relation-speciﬁc assets that need to be protected, this governance structure is efﬁcient and offers strong incentives. At high levels of asset speciﬁcity, on the other hand, market relations break down because the ﬁrm incurring the speciﬁc investments ﬁnds insufﬁcient 76 Determinants of supplier dependence 77 protection. Therefore, integration of both ﬁrms under common ownership and hierarchical control of transactions is to be expected. At intermediate levels of asset speciﬁcity, full integration would not be efﬁcient, but a governance structure offering more protection than a pure market relation will have to be erected. In this case the relationship is more durable and tight than the typical market relationship, but at the same time looser than the relationship between...
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