Choice of subcontractor in markets with asymmetric information: reputation and price effects

  • Harald Biong
  • Journal of Business and Industrial Marketing, January 2013, Emerald
  • DOI: 10.1108/08858621311285723

How to assure low price and high quality in supplier selection

What is it about?

When contractors choose suppliers to a construction project, price often is the dominant selection criterion. Yet, choosing the lowest price option can be costly because low price suppliers have incentives to provide low quality during service delivery. Suppliers, on their side, face a similar problem. High-quality sellers need to credibly distinguish themselves from low quality suppliers and make their price trustworthy. A conjoint experiment among 19 contractors is used to suggest solutions to the problems described.

Why is it important?

One strategy for high-quality sellers in situations where quality is uncertain and difficult to assess is to invest in various signals to build a quality reputation. This study shows that although low price is generally important for supplier selection, the results indicate that quality- sensitive buyers are willing to pay a price premium when poor quality may cause economic losses. Furthermore, the combined effect of the reputation variables outweighs price. Still buyers are not willing to pay price premiums to suppliers with a quality reputation – a finding contradicting extant B2B brand equity literature. In fact, the findings suggest that reputation makes low prices more trustworthy.

Perspectives

Dr Harald Biong
BI Norwegian Business School

In this study I used information economics as the theoretical basis. Information economics is, in my view, fascinating because it is highly relevant for analyzing real life business problems, yet it often produces counter intuitive but logical findings. For example, the findings showing that professional buyers only will pay a competitive price to suppliers with a quality reputation challenge perspectives presented in the extant B2B brand equity literature.

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http://dx.doi.org/10.1108/08858621311285723

The following have contributed to this page: Dr Harald Biong