Competition, Governance, and Relationship-Specific Investments: Theory and Implications for Strategy

Abstract:     
This paper uses biform games to examine the endogenous decision to invest in relationship-specific assets. It addresses the questions of how competition affects suppliers’ decisions to produce a general-purpose product or a relationship-specific product for a buyer and under what circumstances a governance arrangement designed to share investment costs between the transacting parties increases the investment in relationship-specific assets. We offer a balanced perspective that emphasizes both the superior transaction value of relationship-specific products and their high transaction costs while considering the competition effects generated by alternative investment plans. The model and its extensions generate new insights into investment decisions regarding relationship-specific assets.

Number of Pages in PDF File: 41

Keywords: asset specificity, relationship-specific investment, competition, governance, biform game

Accepted Paper Series