Managing vertical and horizontal supply chain relationships in the absence of formal contracts

Abstract

The dissertation consists of three essays that explore signaling mechanisms for coordinating inter and intra supply chain relationships when formal contracts either are not used, or cannot be used. In the first essay, we examine the role of performance based compensation in encouraging strategic investment from suppliers. By altering the senior management’s incentives, a compensation plan can serve as a credible commitment to higher levels of output from the firm. Such a commitment can motivate suppliers to enter the industry and invest in capacity. The analysis shows that, by providing managers with appropriately designed compensation, a firm’s shareholders can increase the return on their investment. In the second essay, we consider the technology licensing in the context of complementary interactions. We investigate how the firm with patent protection can benefit from licensing its technology to other manufacturers even if these other firms do not enjoy a cost advantage. Licensing can provide a credible commitment to the availability of the patent protected product, thereby encouraging output of the complement. We show the conditions under which a firm can earn more from licensing its technology to firms than it can by serving the market as a monopolist. In addition, we explore alternative types of license arrangements in the study. In the last essay, we investigate the product line strategy under complementarity. If the product is differentiable, a monopolist under strong enough complementary effects would provide a broader product line than he would if the demand for his product was independent of other markets. In addition, we show that providing a broader product line and technology licensing are strategic complements to each other. Finally, the quality decision is studied when the firm licenses the technology to other manufacturers.