Supplier Switching, Buyer-Specific Behavioral Uncertainty, and Value Appropriation

Abstract

Our study combines theoretical insights from competitive strategy and transaction cost economics to examine how the price of an exchange changes when a buyer switches its exchange contract to a new supplier. Developing a bargaining power perspective, we posit that transaction costs linked to behavioral uncertainty affect a buyer’s ability to leverage supply-side market competition to appropriate higher exchange value. In the context of US audit services, we first test theoretically derived hypotheses for price of the initial audit engagement following supplier switching. We then perform a battery of analyses that examine both the intertemporal dimensions of the buyer-auditor relationship and market segmentation effects across two major auditor groups. Our empirical findings provide correlational evidence consistent with the proposition that supply-side competition bestows a buyer with a bargaining advantage when negotiating exchange price with a new supplier. However, buyer-specific behavioral uncertainty is associated with a reduction in the buyer’s advantage, allowing the supplier to charge a higher price. We also offer evidence of intertemporal and market segmentation effects that allow us to quantify the dynamism in price-bargaining as competitive conditions and behavioral uncertainty evolve over time. Together, our results provide insights into how transaction costs associated with behavioral uncertainty interact with competitive forces to influence relative bargaining power, and in turn, exchange price.