Symbolic Awards in Buyer-Supplier Relations

Abstract

Problem definition: Giving out a symbolic “supplier of the year” or “outstanding supplier” award can be beneficial for a buyer as it may incentivize a supplier to exert higher efforts. However, when a good supplier is scarce, the award announces which supplier is particularly good and may increase the cost of building and maintaining the relationship. This paper studies both positive and negative effects of a symbolic award and offers explanations on underlying behavioral mechanisms. Academic/practical relevance: We show that symbolic awards can effectively incentivize suppliers to provide high effort, improving a buyer’s bottom line. This is particularly relevant in cases in which certain aspects of a buyer–supplier relationship are not contractible and suppliers have discretion over the quality provided. The award format significantly influences the award’s effectiveness. Methodology: We develop a game-theoretical model that captures a supplier’s utility for the award in a competitive setting and test the predictions of the model with laboratory experiments. Results: Our experimental results confirm that private symbolic awards have motivating effects and lead to higher buyer profits. When the awards are public, this profit premium diminishes as buyers pay higher prices to get the good suppliers. When the buyer is given the option to make the award public or private, buyers prefer that awards are public over private, anticipating a negative supplier response to their choice of the private award format. Managerial implications: Expressing praise or gratitude for a supplier’s efforts can be highly beneficial for a buyer. However, when there is scarcity of good suppliers, buyers should expect increased competition and accompany the award with efforts to preserve the relationship. Finally, if buyers choose to offer a distinctive award format, private recognitions may be perceived as greedy or self-interested and backfire.