Network Prominence, Bargaining Power, and the Allocation of Value Capture Rights in Alliance Contracts

36 Pages Posted: 27 Aug 2013 Last revised: 10 Sep 2016

See all articles by Umit Ozmel

Umit Ozmel

Purdue University - Krannert School of Management

M. Deniz Yavuz

Purdue University - Krannert School of Management

Jeffrey J. Reuer

Purdue University - Krannert School of Management

Todd Zenger

University of Utah

Date Written: August 27, 2013

Abstract

We suggest and provide empirical evidence that the bargaining power of alliance partners stemming from their prominence in alliance networks influences the ex-ante allocation of value capturing rights in high-tech alliance contracts. Network prominence can enhance the availability of alternative partners for a firm, and thereby elevates the firm’s bargaining power and enables the firm to receive i) more value capturing rights vis-à-vis its partner (i.e., more net value capturing rights) and ii) more rights to the unexpected outcomes vis-à-vis its partner. We empirically investigate the content of R&D collaboration contracts between biotech and pharmaceutical firms and show that as the prominence of the client (i.e., pharmaceutical firm) increases, it is able to attain i) more net value capturing rights to outcomes within the area of collaboration and ii) more rights to unexpected outcomes. By contrast, increased prominence of the R&D firm (i.e., biotech firm) decreases both the number of net value capturing rights the client receives as well as the rights to unexpected outcomes that the client captures in an alliance contract. The bargaining power that the R&D firm attains from its prominent position in alliance networks becomes less important during hot IPO markets, which provide the R&D firm more outside options to obtain financial resources. Hence, our paper documents that firms’ network positions can be an important source of bargaining power, contributing to the literature on strategic alliances, bargaining, and contract design.

Keywords: network prominence, bargaining power, entrepreneurial firms, alliance contracts, contract complexity, value capturing rights, incomplete contracts

JEL Classification: L14, L24, L10, L20, L65, D23

Suggested Citation

Ozmel, Umit and Yavuz, M. Deniz and Reuer, Jeffrey J. and Zenger, Todd R., Network Prominence, Bargaining Power, and the Allocation of Value Capture Rights in Alliance Contracts (August 27, 2013). Available at SSRN: https://ssrn.com/abstract=2316793 or http://dx.doi.org/10.2139/ssrn.2316793

Umit Ozmel (Contact Author)

Purdue University - Krannert School of Management ( email )

610 Purdue Mall
West Lafayette, IN 47907
United States

M. Deniz Yavuz

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

Jeffrey J. Reuer

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

Todd R. Zenger

University of Utah ( email )

David Eccles School of Business
1655 East Campus Center Drive
Salt Lake City, UT 84112
United States
801 585-3981 (Phone)
801 581-7939 (Fax)

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