Contracts in asymmetric relationships

Mouzas, Stefanos and Ford, David (2007) Contracts in asymmetric relationships. The IMP Journal, 1 (3). pp. 42-63. ISSN 0809-7259

Abstract

Manufacturer-retailer relationships demonstrate the existence of asymmetric relationships among companies. A large number of consumer goods manufacturers negotiate and conclude contracts with a small number of highly concentrated grocery retailers. Consumer goods manufacturers have expertise in the areas of sourcing, producing and marketing branded products which are demanded by consumers. However, these manufacturers need to obtain listing for their brands within few grocery retailers which represent a significant share of their business. Many companies choose to become dependent on other strong companies because of the benefits that derive from their relationships, even if they are asymmetric. The benefits may include securing substantial business size, cost advantages or rationalisation of production and supply, simplification of business process and business reliance. Mergers & acquisitions, shifting economic conditions, rapid technological changes, as well as global sourcing create conditions for growing asymmetric interdependencies among companies. The present paper deals with an increasingly important question, which is about how companies are contracting in these asymmetric relationships. Based on empirical research in manufacturer-retailer relationships that covered the period between 2002 and 2005, the study examines how companies use contracts to manifest their joint choices over time. In general, contracts are manifestations of consent that give legal effect to business relationships. In asymmetric relationships, such as manufacturer-retailer relationships, companies choose to retreat from immediate contracts and arrange framework contracts (often called umbrella agreements) to balance the need for certainty with the wish to remain sufficiently flexible (Mouzas and Ford, 2006). A framework contract between two companies is not concerned with contractual decisions. Instead it articulates a domain consensus by specifying the scope of business; defines the basic rules and principles that govern an interdependent symbiosis between the parties and expresses the inherent goal incompatibility between parties by mapping the parties’ relevant interests as well as their business assumptions. This research provides empirical evidence of three intriguing findings: a) framework contracts are made in established and continuing relationships and not in new untested relationships b) framework contracts are more important for the stronger party in asymmetric relationships and c) framework contracts do not mirror contractual decisions but provide a framework in which contractual decisions are made. The study discusses these findings and draws conclusions on the role of contracts and more widely on the nature of interdependence itself.