Flexibility in Buyer-Seller Relationships: A Transaction Cost Economics Extension based on Real Options Analysis (Business-to-Business-Marketing)

In marketing research, industrial buyer-seller relationships are frequently analyzed by Transaction Cost Economics (TCE). The TCE rationale tends to emphasize the benefits of reduced flexibility in relationships. Institutional safeguards are recommended in order to protect against behavioral uncertainty thereby simultaneously reducing flexibility. Nevertheless, this perspective largely disregards the value of greater flexibility in the presence of environmental uncertainty. Due to environmental change, "better" outside options can emerge requiring flexibility to react. Consequently, a flexibility trade-off emerges when relationships are affected by both behavioral and environmental uncertainty. Ellen Roemer analyzes the flexibility trade-off in buyer-seller relationships. She investigates how relationships should be managed when there is behavioral and environmental uncertainty. TCE, real options analysis, and Austrian economics are used to explore the flexibility trade-off. By extending traditional TCE by real options analysis, an optimum degree of flexibility can be determined. Foreword Long-term buyer-seller relationships are a real and important phenomenon in business-to­ business markets. Since the consequences for the parties to a relationship heavily depend on the management of these relationships, research becomes increasingly intensive to explain the real phenomenon of buyer-seller relationships. On the one hand, the objective is to determine when relationships are a reasonable form of coordination in markets. On the other hand, the management of the relationship itself is in the focus of the analysis. Transaction Cost Economics (TCE) has been proven a fruitful theoretical approach explaining both research objectives. TCE provides not only insights in which situations relationships are economically reasonable but also which activities are appropriate to protect ex post benefits on both sides of the relationship from an ex ante perspective. In relation to the second research objective of the buyer-seller relationship manage­ ment, safeguarding mechanisms - protection against opportunistic behavior - were in the center of the analysis in the business-to-business relationship literature. In contrast, the flexibility to react to changing environmental conditions was largely neglected in buyer­ seller relationship management. The reason for this one-eyed perspective can be traced back to the comparative static approach as proposed by TCE comparing the efficiency of different coordination forms at one point of time. Intuitively it becomes clear that con­ tractual safeguards to limit behavioral uncertainty do not only provide advantages but also reduce the repertoire of the parties to react to future, unexpected developments. Front Matter....Pages I-XIX The Necessity of an Analysis of Flexibility in Buyer-Seller Relationships....Pages 1-9 A Transaction Cost Economics Explanation of Buyer-Seller Relationships....Pages 10-33 The Analysis of Flexibility in Buyer-Seller Relationships from a Transaction Cost Economics Perspective....Pages 34-80 Rational Flexibility in Buyer-Seller Relationships — A Real Options Approach....Pages 81-121 Real Flexibility in Buyer-Seller Relationships — An Austrian Economics Perspective....Pages 122-153 Conclusions....Pages 154-158 Back Matter....Pages 159-195