Choice of subcontractor in markets with asymmetric information: reputation and price effects
Journal of Business & Industrial Marketing
ISSN: 0885-8624
Article publication date: 28 January 2013
Abstract
Purpose
Buyers assessing bids from suppliers of experience services face both an adverse selection and a potential moral hazard problem. The purpose of this study is to examine the relative importance of various signals of supplier reputation conveying information about unobserved supplier quality, which is important for identifying the best tender; and whether price is contingent on supplier reputation and on buyer's quality sensitiveness in a competitive bidding situation.
Design/methodology/approach
This study builds on a conjoint experiment where 19 contractors consider alternative scenarios representing tenders from subcontractors of plumbing services. In the scenarios the subcontractors differ on their reputation and price variables, while the contractors differ in their quality sensitiveness. Multiple regressions analyzes the contingent price effects.
Findings
Although low price is generally important for subcontractor selection, quality-sensitive buyers are willing to pay subcontractors a price premium to prevent quality debasement. On the other hand, despite the combined significance of supplier reputation on choice, buyers are not willing to pay price premiums to suppliers with a quality reputation.
Research limitations/implications
Conjoint studies produce multiple cases but the underlying sample is limited. Therefore, this study should be regarded as preliminary and a basis for further validation on larger samples.
Practical implications
In competitive bidding situations, suppliers with strong quality reputations may benefit most by low price offers. Thus, suppliers with a strong reputation should achieve profitability through a volume premium rather than a price premium effect. Suppliers opting for price premiums should target the quality sensitive segment of the market.
Originality/value
In contrast to previous findings in B2B brand equity studies, but in line with findings in information economics, this study suggests that suppliers with a reputation for quality will not receive price premiums. The results indicate that in bidding contexts in B2B markets, the reputation variables may enhance rather than reduce buyers' price sensitivity, because supplier reputation increases low price credibility.
Keywords
Acknowledgements
Received 11 January 2010Revised 29 December 201025 May 2011Accepted 5 July 2011The author gratefully acknowledges the assistance of Christian Henriksen and Jon Holth Egeberg with the field interviews and data collection. The author also acknowledges the comments and suggestions from Mark E. Bergen, Ragnhild Silkoset, participants at the 2nd Winter Workshop on Interorganizational Studies at Geilo, 2008, and from participants at the 2nd Johan Arndt Memorial Marketing Conference at the Norwegian School of Economics and Business Administration.
Citation
Biong, H. (2013), "Choice of subcontractor in markets with asymmetric information: reputation and price effects", Journal of Business & Industrial Marketing, Vol. 28 No. 1, pp. 60-71. https://doi.org/10.1108/08858621311285723
Publisher
:Emerald Group Publishing Limited
Copyright © 2013, Emerald Group Publishing Limited