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© 1996 Oxford University Press

research-article

Mitigating Procurement Hazards in the Context of Innovation

JOHN M. DE FIGUEIREDO and DAVID J. TEECE

Haas School of Business, University of California, Berkeley, CA 94720–1930 USA

Abstract

This paper extends the transaction cost economics framework to examine the contractual hazards that arise in the course of technological innovation. We identify three main strategic hazards related to future technological opportunities that may develop in business transactions: loss of technological pacing possibilities on the technological frontier, loss of technological control at or behind the frontier, and design omissions. In examining these hazards we focus on the increasingly common phenomenon of vertically integrated firms supplying downstream competitors. We then analyze how constellations of safeguards, particularly relational safeguards, can augment transaction-specific safeguards in many instances to ensure high-powered incentives are maintained. We also consider under what conditions downstream divestiture is a desirable economizing option. Supportive illustrations are drawn from the desktop laser printer and telecommunications industries.


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