Managing Opportunism in a Distribution Network: The Observer Effect of Punishment

Previous research in marketing channels has identified mechanisms such as monitoring and incentive devices to deter opportunism by exchange partners (Wathne and Heide 2000). However, whether and how disciplinary actions or punishment can be employed as an effective tool to manage partners’ ex post opportunism remains unclear. In conventional marketing literature, punishment is discouraged because it is thought to produce undesirable outcomes to the relationship such as conflict (Frazier and Summers 1984), lower satisfaction (Geyskens, Steenkamp, and Kumar, 1999), or retaliation (Kumar, Scheer, and Steenkamp 1998). This view dominates in the literature, despite some evidence suggesting that punishment can actually result in positive outcomes (Antia et al. 2006; Henrich 2006; Scheer 1993).

In this proposed study, we extend beyond the dyadic view of punishment between a manufacturer and distributor. We consider the effect of punishment on observers – other distributors in the channel network who take an interest in the punishment of a focal one. We argue that a punishment event not only affects the disciplined distributor, but also changes the attitudes and behavior of those in the same distribution network (i.e. observers). In particular, when punishment is viewed as a social event, it implies social norms within the network of relationships, signals appropriate and inappropriate behaviors to observers, and creates perceptions of the manufacture as fair or unfair. From this social perspective, punishment has a significant effect on deterring observers’ subsequent opportunism. This “observer effect” is more critical to the manufacturer’s, overall strategy, as it has an impact on a greater number of participants.

Integrating insights from deterrence theory, fairness theory, and social network theory, we aim to develop a framework on the social effects of punishment in a distribution network. Our investigation will be based on a survey of distributors from multiple industries in China, with three specific research questions: (1) How a punishment event can directly deter observers’ ex post opportunism? (2) How fairness judgment of the event builds up observers’ trust towards the manufacturer, which explains their reduced opportunism? (3) How the disciplined distributor’s network embeddedness and the manufacturer’s monitoring capability can moderate the direct and the indirect mechanisms as described in (1) and (2) to reduce opportunism.

By addressing these questions, the study will not only contribute to a broader understanding of using punishment to manage opportunism in channel governance, but also provide important implications for companies to develop trust and cooperation in channel relationships in China.