Custom and Standard Inputs Sample Clauses

Custom and Standard Inputs. As we noted above, the majority of the suppliers maintain inventories of the goods and sell them to multiple buyers. The risk to the buyer should be much lower where standard inputs are involved. The willingness to switch depends on the nature of the goods being purchased. If goods are custom-made, then the downside risk of switching may be high. If the new supplier fails to deliver at the promised time or to manufacture to the promised specifications, it will be hard find a replacement supplier. With standard items, by contrast, the consequences of nonperformance by the new supplier are less severe, as substitute suppliers are likely to be available. Functioning courts lower the downside risk of switching when the goods are custom- made, because the new supplier can be legally held to its promises on delivery time and specifications. Courts, therefore, are predicted to have a greater effect on the propensity to switch when goods are customized than when they are standardized. Again, a simple test of differences in means suggest that this is the case. In relationships involving custom inputs, buyers who believe that courts are effective reject the offer 21% of the time, while those saying courts are not effective reject the offer 33% of the time (t=2.12, n=263). Buyers of standard goods who believe that courts are effective are also less likely to reject the new offer, but the difference is much smaller (13% vs. 16%, t=1.67, n=846). The regressions in columns 4 and 5 of Table 6 confirm this difference. The sample in column 4 is limited to custom inputs. Firms who believe courts are effective are 19% less likely to reject the offer, controlling for other factors. Among relationships with standard inputs (column 5), the effect of courts is much smaller (3%) and is not significant. These differences across types of goods are robust to other categorizations of the goods. A second categorization of complex relationships includes those where there is no alternative supplier or goods which are produced uniquely for the buyer. Belief in courts has a significant effect on the likelihood the offer is rejected for these goods (β= - 0.16, t=2.92, 37% of the sample) but not for more standard goods (β= - 0.004, t=0.26, 63% of the sample). We also asked firms how long it would take them to find alternative supplies if the supplier failed to delivery as promised. The responses were “a day or less” (15% of responses), 1 day to 1 week (31%), a week to a month (33%), more th...