Completeness, and Buyer-supplier Relationships

The theory of incomplete contracts has been used to study the relationship between buyers and suppliers following the deployment of modern information technology to facilitate coordination between them. Previous research has sought to explain anecdotal evidence from some industries on the recent reduction in the number of suppliers selected to do business with buyers, by appealing to relationship-specific costs that suppliers may incur. In contrast, this paper emphasizes the fact that information technology enables greater completeness of buyer-supplier contracts through more economical monitoring of additional dimensions of supplier performance. The number of terms included in the contract is an imperfect substitute for the number of suppliers. Based on this result, alternative conditions are identified under which increased use of information technology leads to a reduction in the number of suppliers without invoking relationship-specific costs. Conditions are also identified when increased use of information technology leads to an increase in the number of suppliers.