When Does Vertical Coordination Improve Industrial Purchasing Relationships?

Vertically coordinated ties are purportedly effective responses to the uncertainties of fast-changing purchasing environments. Building on transaction costs arguments and related work in marketing, the authors analyze vertical coordination as a response to external uncertainty and show that its effectiveness is highly contingent on the magnitude of the safeguarding problem present. Indeed, its beneficial effects can be overwhelmed by the consequential increase in trading hazards. The authors use survey data from a sample of 161 industrial buyers to test the hypotheses. When specific investments are modest, greater vertical coordination diminishes transaction difficulties in adapting to high environmental uncertainty. Conversely, vertical coordination increases transaction difficulties when firms adapt to high environmental uncertainty and specific investments are substantial. The authors discuss the importance of these results for transaction cost theory and develop the results into a managerial decision framework for designing purchasing ties that balances safeguarding and adaptation.