When Should Original Equipment Manufacturers Use Branded Component Contracts with Suppliers?

Branded components are becoming increasingly popular in industrial markets; yet extant research provides limited understanding of the use of such arrangements in the real world. The authors use the governance lens of transaction cost economics to propose that leveraging the vendor's brand reputation and safeguarding the vendor's customization investments are key motivators for choosing branded component contracts. Data on 191 contracts from three engineering-intensive industry sectors provide support to the authors' hypotheses. The authors find that firms are more likely to choose branded component contracts when the supplier's brand name adds significant differentiation (leveraging) and when the component supplier has made significant component customization investments (safeguarding). This safeguarding motivation is relevant even to suppliers with modest brand reputation. The authors also investigate the normative consequences of these contracting decisions and find significant adverse outcomes from choosing the "wrong" contract form. Furthermore, they find that these outcomes are asymmetric in nature. In particular, choosing a "white box" contract when the theory argues for a branded component contract leads to more adverse outcomes than choosing a branded component contract when the theory predicts a "white box" contract. Finally, the authors draw key conclusions for theory and managerial practice.