Academic journal article Journal of Supply Chain Management

Reference Prices as Determinants of Business-to-Business Price Negotiation Outcomes: An Empirical Perspective from the Chemical Industry

Academic journal article Journal of Supply Chain Management

Reference Prices as Determinants of Business-to-Business Price Negotiation Outcomes: An Empirical Perspective from the Chemical Industry

Article excerpt

INTRODUCTION

Price negotiations in business relationships provide an opportunity to adjust prices to recent changes in material and process costs, as well as realize loyalty premiums. However, literature that approaches price negotiation from a supply chain management (SCM) perspective has been scarce and dispersed (Zachariassen 2008). Existing frameworks and models are mainly rooted in neoclassical thinking and transaction cost economics (TCE), neglecting a potential psychological perspective (Carter, Kaufmann and Michel 2007). Moreover, student experiments in the psychological negotiation domain (Krause, Terpend and Petersen 2006) require particular attention to internal validity (Bachrach and Bendoly 2011; lickerd and Bendoly 201 1) and may be limited in their external validity (Stevens 2011). Finally, empirical approaches that use mail surveys in the SCM domain are likely to produce less innovative insights (Carter and Ellram 2003).

To overcome these shortcomings, we integrate a TCE perspective with the reference price concept that is common in consumer behavior research and thus pursue a better understanding of price negotiations in supply chain relationships. With industrial price negotiation data from the chemical industry, we also overcome some methodological shortcomings of existing studies. In particular, we seek to understand how three reference prices--reservation, aspiration and initial price offering--influence the settlement price ultimately achieved in a negotiation.

We begin by drawing on a TCE perspective on business relationships, then discuss negotiations in the supply chain. Thereafter, we explain adaption-level theory and prospect theory, which are common inputs to consumer-oriented reference price research, and use them to model the settlement price of price negotiations in a SCM context. To test our proposed model, we use price negotiation data obtained from salespeople at a German chemical producer. In discussing the results and relating them back to TCE and psychological negotiation literature, we derive implications for researchers and industrial sellers and buyers.

PERSPECTIVES ON PRICE NEGOTIATIONS IN A SUPPLY CHAIN CONTEXT

A Transaction Cost Perspective on Business Relationships

A common method to investigate and explain business exchange relationships is TCE (e.g., Williamson 1996, 2008; Joshi and Stump 1999), which reflects the assumption that production costs are not influenced by the organization of the exchange (Williamson 1996). Accordingly, transaction costs, which result from preparing, negotiating and realizing a transaction, are the main unit of analysis. A transaction takes place if its transaction cost is lower than that of any alternative transaction (van Hoek 2000). In this con-text, a transaction's asset specificity, uncertainty and frequency are relevant cost drivers (Ellram 1991).

Asset specificity refers to the extent to which investments made to support a transaction have more value for that specific transaction than they would if used elsewhere (Lonsdale 2001). On the one hand, asset specificity constitutes the basis of cost advantages that result from joint action. On the other hand, it can lead to lock-in and operational and fiscal hostage taking. We reconsider this aspect carefully in the discussion section. Uncertainty results from "[unanticipated environmental changes [that] consist of two types: changes in market factors (such as price) that impact demand or changes in technology" (McNally and Griffin 2004, p. 7). With regard to technological development and market factors, uncertainty provides the basis for regular renegotiations of specified transactions in a continuous relationship. We account for it in our basic approach of investigating annual pricing reviews. Finally, frequency describes the extent to which transactions are repeated on a regular basis, because "preserving continuity between a particular buyer-seller pair is the source of added value" in supply chains (Williamson 2008, p. …

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