Download Study on Strategy of Preventing Opportunism in Marketing Channels

Study on Strategy of Preventing Opportunism in Marketing Channels
SUN Hongjie1, ZHOU Quan2
1. Institute Of Brand Science,Chongqing University Of Arts And Sciences, Chongqing, China ,402160
2. School of Strategic Planning ,Chongqing Technology and Business University, Chongqing, China,
400067
[email protected]
Abstract: Marketing channel management has entered a cooperation era. Cooperation is an important
issue in marketing channel management, and opportunism is a vital factor to affect the cooperation. This
paper expounds the importance of preventing the opportunism in marketing channel system, analyzes
the major causes for opportunism from view of special-purpose quasi-rent of new system economics,
and puts forward the solutions of equilibrium strategy, as well as an mechanism within marketing
channel system to prevent opportunism.
Keywords: marketing channel, opportunism, and exploitative quasi-rent
1 Introduction
The traditional perspective on marketing is based on the match between demand of market and
supply of enterprises. The enterprises can succeed if they do market researches on products and services
carefully and make marketing mix correctly. However, this point of view needs reconsideration, as the
continuous competitive advantages cannot be gained in that way. Because today competitors more easily
clone technology and brand value, it is of great necessity to reevaluate enterprises’ competition methods
today. [1] The cooperation relationship among companies has become a common policy for them to
obtain and maintain competitive advantages. [2] Marketing channel management has entered a
cooperation era.
The exact virtue of marketing channel cooperation lies in integration of the whole system by
sharing information and planning together so as to enhance reaction, reduce cost, and minus duplication
and waste. With increasing of the inner inter-dependence within the marketing channel system,
cooperation and partnership become the primary point for long-term win-win. [2] The partners in a
marketing channel system reduce friction and gain competitive power only if they cooperate with one
another. [3][4][5]
As we know, however, both consistency and conflict of benefits exist among the enterprises in
marketing channel system. Therefore, opportunism is inclined to occur among the enterprises within
marketing channel system, which will do harm to efficiency and competitive power of cooperation in
the marketing channel.[6]
So for doing research on marketing channel, it is a vital proposition to study how to prevent
opportunism among enterprises within marketing channel system so as to facilitate their cooperation.
2 Probe how opportunism come into being in terms of exploitative quasi-rent
Opportunism is an important hypothesis of behavior in organizational economics. According to
Williamson, opportunism is defined as “seeking one’s own profits by using cheating methods which
include but not only lying, stealing and cheating. From a more common stand, it refers to less unveiling
or distorting information, especially misleading, distorting, cheating or other confusing on purpose.
(Williamson 1995)[6].” Opportunism has two forms as ex-event and post-event. Ex-event results from
unbalance of information, which leads to contractor’s unwillingness to unveil all the related information,
even make up false information to disturb other party’s determination in sake of its own interests.
Post-event opportunism is ethics risk, concerning about implementing contract. Contactor behaves
without full responsibility for the purpose of lowering risk of implementing or gaining maximum profits.
Opportunism discussed in the following passage mainly focus on post-event.
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There are various causes for opportunism taking place, and the existence of exploitative quasi-rent
ranks the primary factor.
Benjamin Clinin defined exploitative quasi-rent in asset for special purpose as: supposing one
person owns an asset and rents it to someone else. The quasi-rent value of the asset is the part of value
that surpasses its hangover—i.e. value to someone else in an inferior use. The potential exploitative part
for special purpose in quasi-rent, if exists, is the part surpassing the value of its inferior use. [7]
One asset, due to its special use, does have margin between best use and inferior use, which forms
exploitative quasi-rent.
Those arguments manifest that once the investor’s asset is invested, its dynamic cost may be so
high or so concentrated on one user that the user can achieve no less asset reward even if the price
paying for the owner is forced down. Once an investment for special purpose happens and quasi-rent
have come into being, there will be great possibility that opportunism could occur. [7]
Cooperation relationship among enterprises does have a certain kind of special purpose in some
degree in marketing channel system. Because it takes a long period and much effort for the enterprises
in a marketing channel system obtain consistency in information system, business process and corporate
culture, great losses can take place if choose a new firm instead of old one. That means exploitative
quasi-rent occurs in the enterprises within marketing channel system. Therefore, it is quite possible for
emergence of opportunism behavior because of existence of exploitative quasi-rent.
3 Policies for preventing opportunism
To avoid harm to marketing channel system done by opportunism, the organizers or leaders may
guard against it through two ways. Firstly, they may design system of marketing channel on a strategic
stand and use equilibrium strategy. Secondly, preventing mechanism can be designed within marketing
channel system. The following paragraphs will focus on specific discussion on those tow methods.
3.1 Construction of balanced supply chain
Considering effect on marketing channel system by system force, exploitative quasi-rent and
transferring cost, the author has raised idea of equilibrium strategy (2002)[8]. Equilibrium strategy refers
to when construct a marketing channel system; the manufacturer should equilibrize the different
distributors on the same level in partner-selecting and cooperating policies, which make the distributors
in a balanced situation. This kind of marketing channel system makes the manufacturer as its center,
which the manufacturer takes advantageous point in the overall system and minus the chances for
distributors in cooperation and control transferring cost. Construction of balanced marketing channel
system is favorable for the stability of the system and avoiding destruction to the system because of
internal and external changes of the system. In our opinion, the equilibrium strategy can be employed
not only in selecting cooperate partners and planning cooperate system, but also in preventing
opportunism behavior. Next we will further our study and explanation on guarding against opportunism
on the base of original constructed model.
Supposing the manufacturer is A, while it has two standby distributors on a certain level: B1 and
B2. A, B1 and B2 form a somehow relatively obdurate circle. And B1 is better in price, service, and
product quality and deliver time comparing with B2. Choosing one of them means the other is out or
joins in other chains.
As establishment of cooperation forms a kind of asset for special purpose to a certain degree,
including cultural syncretizing and recognizing, mutual believing and process reengineering, the
manufacturer has to pay out cost for dismissing the old distributor and choosing a new one. So the
specialty of investment increases when the manufacturer selects another distributor . And it decreases
when choose two and suitability for relationship investment rise.
Supposing income per unit for A is u, B provides certain service for A. Because B1 and B2 are
competitors on the same level, the weakness in the structure cause B1 and B2 ask for competitive price
w’ to A.
w′ = w • (1 − θ )
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，
in the formula, θ reflects structural competitive degree 0 ≤ θ ≤ 1 . w is price unit claimed by B when
there is no competitor.
Because the marketing channel system is a relatively close transaction circle, if A only chooses one
from B1 or B2 to cooperate, then investment for special purpose is formed in the cooperation. When the
unselected one is out from the transaction, a certain monopoly rent and exploitative quasi-rent come into
being. Supposing exploitative quasi-rent per unit is c whose amount is affected by the cost of the
integration of newly built cooperation and supposing it is not presented as charge. While A chooses B1
and B2 simultaneously, it has to spend cost to keep them in balance. And we suppose the cost is c’.
In the case of long-term cooperation, A only chooses B1 as its partner, and B1 overlooks its benefit
concession before B2 is out. A must measure its benefit before decide to choose only B1 or B1 and B2
together.
u −w−c
When only choose B1, the benefit per unit is
While choose B1and B2, the benefit per unit is u − w′ − c ′
If
i.e.
：
：
u − w − c < u − w′ − c ′
w − w′ > c ′ − c
＋
θ • w c > c′
i.e.
When the formula is tenable, the equilibrium strategy is necessary and feasible.
The inequation shows that competitive charge must be lower than monopoly charge because of
exist of competition. Thus the expense of monopoly rent can be avoided and positive income can be
gained. The key point lies in the portion between quasi-rent for special purpose and cost for maintaining
balance. Only if the total funds spent on quasi-rent for special purpose and monopoly rents surpass
investment on keeping balance, it is feasible to take management policy of balance supply chain. In this
case, the amount of quasi-rent for special purpose and monopoly rent is so large in practice because of
obturating nature in the transaction circle that it is quite possible to use equilibrium strategy.
Therefore, when the total funds spent on quasi-rent for special purpose and monopoly rent surpass
investment on keeping balance, using equilibrium strategy can reduce investment specialty and expense
of monopoly, thus opportunism behavior can be deducted. [7]
3.2 Design of preventing mechanism
Enterprise can take vertical integration or long-term contract to prevent opportunism. Vertical
integration is beyond the study in this paper, so we mainly expound preventing opportunism in terms of
long-term contract.
In theory, the explicit long-term contract can deal with problem of opportunism, however, it is a
kind of solution with high cost. The long-term contract needs to regulate costs of could-be accident,
defying contract or supervising of implementing contract by force and suing on court.
Due to impossibility to regulate could-be accident with low cost in contract and even unpredictable
factor, in addition with high cost for conflict-solving by law, contractors usually depend on recessive
contract. Implementation of recessive contract abides by market mechanism rather than legal
mechanism, i.e., it causes capital loss through terminating expected future business.
Proofs by Macaulay shows that according to the inequation, business relationship is often in
accordance with the cooperation without compelling law force, but rarely depends on law punishment.
Enterprises a usually depend on market punishment beyond law to avoid partners’ breaking
contract. E.g., an opportunism enterprise devaluates its commercial credibility because of loss of its
expected future business. The market mechanism of implementing contract runs in a way that providing
a chance of future “subsidy” to the “diving” fraud actor.
Then we study on guarding against opportunism of quasi-rent for special purpose. Supposing
quasi-rent is r; distributors’ normal profit each term is Y ; allowance profit each term is m ; discount is
q
probability of discovering opportunism is p ; distributors’ other income upon being found
，
opportunism and ending contract is v terms of contract are n .
We set the following hypothesis for the distributors. (a) The distributors are economic person with
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limited reason, whose behavior is in accordance with maximum utility; (b) producers and distributors
have unequal information possession on the behavior of exploitative quasi-rent for special purpose, and
distributors take advantages; (c) distributors may take opportunism behavior for the sake of their own
profits, which impair other enterprises’ benefits.[9][10]
Distributors act by following this logic: they try to decide whether take opportunism behavior or
not to obtain long-term benefit in accordance with principle of maximum utility. Furthermore, the
opportunism behavior will last as soon as it is taken.
The distributors’ accumulative utility in n terms without taking opportunism is
n
(Y + m) (1 − q ) (1 − q)
The distributors’ accumulative utility in n terms with taking opportunism is
（[ Y + m + r )(1 − p) + vp](1 − q )
n
1− q
So, to prevent distributors’ opportunism, it must be
Y + m > (Y + r + m)(1 − p) + vp
r
m > + v − r −Y
p
that is
The present value of future subsidy, m, must be over the value increased through fraud and
termination of partnership by the potential cheaters. Providing long-term contract to potential cheaters
will eliminate their opportunism.
The expected business relationship maintains less time as the benefits gained by fraud are bigger
(longer time to determine defying and implementing contract and change suppliers, higher cost). In a
balance situation without fraud, subsidity reaches a higher level. Hence, to some degree, it gives insights
on existence of reciprocal contract among enterprises and enterprises’ dependence on some recessive
contract with suppliers. They may pay for the reciprocal business, which seems to be separated
superficially. The threats of terminating partnership restrain their opportunism behaviors.
The subsidy can be imagined as insurance fee paid by enterprises against fraud. Only if the two
trading parties have the same estimation towards benefit from temporary fraud, the amount of supplying
and demanding insurance fee may keep the anticipating opportunism behavior from happening. If
behavior of defying contract is anticipated, then they may pay a sum of money for the subsidy to prevent
the behavior for an optimizing goal, or the trade will not happen if the cost for subsidy to eliminate the
behavior is too high.
Here, we don’t mean that the contract can be implemented without cost or cannot be defied. On the
other hand, in our information-cost hypothesis, the contractors should know exactly when and to what
degree the contract could be defied. Therefore, the unexpected contract defying, i.e., opportunism
behavior cannot occur.
4 Conclusions
Researches on organizational relationship of new organization economics provide a powerful tool
to analyze how to prevent opportunism in marketing channel system; however, it is not just simply
mechanism design in view of tactics. The prophase design of marketing channel system is also a vital
aspect affecting opportunism. We hope there will be further studies on this issue on which we have an
attempt discussion based on balance strategy in this paper.
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