Designing price contracts for procurement and marketing of industrial equipment

Research output: Chapter in Book/Report/Conference proceedingChapter

1 Scopus citations

Abstract

A durable goods contract typically specifies a price determination process, which is an integral part of "rules of the game" that govern the exchange between the contracting parties. Drawing on principles of new institutional economics, these contractual price processes are arrayed on a flexibility continuum ranging from predetermination through redetermination to renegotiation. A well-designed contract specifies a price process that is aligned in a discriminating fashion with the two fundamental problems of efficient exchange-adapting to changed circumstances, while simultaneously safeguarding against opportunism. A simple but effective price design rule is as follows: Greater adaptation needs call for moving away from predetermination processes toward renegotiation processes, while increased opportunism hazards call for moving in the opposite direction. The proper balance is illustrated with two cases involving durable goods. The choice between cost-plus price contracts versus fixed price contracts is shown to yield to this design principle as does the choice between outright sales contracts versus operating leases contracts.

Original languageEnglish (US)
Title of host publicationReview of Marketing Research
PublisherEmerald Group Publishing Ltd.
Pages183-199
Number of pages17
ISBN (Print)9780765620927
DOIs
StatePublished - 2008

Publication series

NameReview of Marketing Research
Volume4
ISSN (Print)1548-6435
ISSN (Electronic)1944-7035

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