Competition or Cooperation? Promoting Supplier Performance with Incentives Under Varying Conditions of Dependence

Abstract

In this study, we use the lens of social exchange theory to investigate the influence of incentives on supplier performance under various conditions of buyer–supplier dependence. We propose that incentives generally fall into two main categories: competitive, market‐based incentives that reward suppliers based on how well they perform relative to other suppliers, and cooperative incentives, where both buyer and supplier share benefits based on their joint performance. Using empirical data collected from 230 buyers in a sample of U.S. industrial firms, we measure the effects of these two types of incentives on various measures of performance, as well as the moderating effects of buyer–supplier dependence. Our results suggest that competitive incentives can be an effective approach to improving delivery, quality, innovation and flexibility, for purchases where the buyer–supplier relationship is characterized by balanced and moderate amounts of mutual dependence. However, competitive incentives are ineffective at generating improved cost performance. Cooperation appears to be the only way to improve cost but is only fruitful under conditions of high mutual dependence. In general, we find that high mutual dependence provides a good basis for cooperative incentives to successfully improve each of the types of performance included in our study. Finally, we find evidence that cooperation and competition can coexist without significant risk of decreased performance.