Pricing Formats for Branded Components: an Investigation in Business-to-business Markets
Abstract: The use of “Branded Components” is an increasingly popular strategy employed by industrial Original Equipment Manufacturers (OEMs) to differentiate their products. Contracts for branded components between OEMs and their component vendors are relational exchanges where both parties contractually agree that the OEM and the vendor would co-brand the OEM’s end-product. In this paper, we use the logic of transaction cost economics to show that safeguarding and adaptation concerns are simultaneously operative in the governance choices in these relational exchanges. Specifically, we ask: Under what conditions are prices for branded components agreed upon ex ante versus negotiated ex post? This choice of pricing formats is determined by whether the differentiation offered by the component is due to either the vendor’s pre-contractual brand strength or the post-contractual customization activities. We argue that vendors possessing pre-existing assets would use more fixed price formats to safeguard these “extra-relational” assets. In contrast, differentiation emanating from post-contractual customization activities is supported by relatively flexible price formats to permit adaptation to product development. Data from 70 branded component contracts is supportive of these hypotheses. Furthermore, we find that fixed price formats are also used when the market strength of the OEMs on their downstream customer side is high. Theoretical and managerial implications are drawn.
