An Empirical Investigation of Branded Component Contracts in Industrial Markets

Despite the strategic significance of a branded component strategy in both consumer and industrial settings, extant empirical research has focused on developing behavioral theories about consumer perceptions of such co-marketing alliances. There is no systematic empirical investigation about actual component branding decisions made by firms or their normative consequences. We offer the first empirical evidence about the behavior of firms in choosing branded component contracts with their suppliers. We develop a conceptual model that highlights three roles of branded components: branded components as differentiators, branded components as risk mitigators, and branded components as efficient governance devices. Data from 191 industrial original equipment manufacturers (OEMs) contracting with their component vendors are used to study the descriptive and normative effects specified in the theories. We find that OEMs choose such contracts in a discriminating fashion following the theories. Specifically, OEMs are more likely to brand a component when a) the component possesses significant differentiation capabilities, and b) when the component supplier has made significant investments specific to the OEM. Our normative analysis shows a significant adverse impact of making the “wrong choice” on OEM performance. However, we also find an interesting asymmetry in the normative consequences. Specifically, we find that unbranded contracts carry a heavy penalty when they are employed in those circumstances where the theory predicts a branded contract. In contrast, branded contracts carry a much lower penalty, and actually provide small gains, when employed in those circumstances where the theory predicts an unbranded contract. Implications for theory and practice are developed.