Exchange Governance: The Role of Legal and NonlegalApproaches Across the Exchange Process

Gregory T. Gundlach

Marketing's emphasis of exchange relationships verstts transactions has prompted interest inapproaches for regulating the conduct of participants in these as.sociations. Becau.se growingscholarship in law has questioned the theoretical and practical consistency of legalapproaches for goveming exchange relationship.^, increasing attention has been given tonontegal approaches. However, empirical and anecdotal evidence .sugge.sts that the lawremains a key mechanism of regulation in exchange. The author investigates the safeguardingnature of legal and nonlegal govemance approaches. Examining exchange as a proce.s.s. heproposes a model of govemance that contrasts the role of these approaches. Implications forthe management and research of exchange relationships and public policy are discussed.

A ttention in marketing has recently focused on ap-proaches for regulating the conduct of parties in-volved in exchange. Applying theories of transaction

cost economics (e.g.. Williamson 1975, 1985), agency (e.g..Arrow 1985), and social cotitract (e.g., Macneil 1980), re-searchers have begun to explore the nature and use of dif-fering forms of govemance. These include, for example, ap-proaches that rely on the authority of law for their enforce-ment such as vertical integration (cf. Anderson 1985; An-derson and Weitz 1983) and quasi-integration extendingfrom contract (Gundlach and Achrol 1993). In addition, em-phasis has been given to social norms (Boyle et al. 1992;Gundlach and Achrol 1993; Heide 1994; Heide and John1992; Kaufmann and Stem 1988; Noordewier, John, andNevin 1990), ethics (Gundlach and Murphy 1993). reputa-tion, and self-interest (Anderson and Weitz 1992)—ap-proaches that do not rely on the law.

Recognition that modem exchange more often involvescomplex long-term associations has bolstered interest ingovemance by providing implications for its understanding.Specifically, the appropriate govemance approach to be ap-plied is complicated by virtue of the intertemporal nature ofthe exchange process. In this respect, contract law's theoret-ical conception of exchange as a discrete, one-time event hasprompted various legal scholars to question its relevance forregulating long-term exchanges (Goetz and Scott 1981;Macneil 1978, 1981). As Robison (1983, p. 699) notes:

Unfortunately, the simple black-letter model of the structurecalled 'contract law" very often neither serves nor reflects reali-ty.... The impact of ongoing relationships, unforeseen changes inthe world ... all too often act to make the model seem ridiculousin practice.

Principles underlying the classic law of contract tend to in-hibit the social climate of exchange (cf. John 1984;

GREGORY T. GUNDLACH is an Associate Professor, Department ofMarketing. University of Notre Dame. The author extends his ap-preciation to members of the Department of Marketing at the Uni-versity of Notre Dame, the reviewers, and the editor for their help-ful comments.

Macaulay 1963; Palay 1985). For these reasons, growingtheoretical scholarship has emphasized the utility of nonle-gal safeguards for more than discrete exchanges.

In contrast to this emphasis, empirical evidence and casu-al observation suggests that the law of contract continues toplay a key govemance role in almost all exchanges. As Vin-cent-Jones (1989, p. 172) notes in reviewing key empiricaistudies of legal contract (i.e.. Beale and Dugdale 1975;Lewis 1982; Livermore 1986; Macaulay 1963). "not sur-prisingly, the law of contract was found to play a significantrole in business relations ... in all of the studies." Indeed, al-though many exchanges today embrace aspects of nonlegalgovemance such as trust and personal bonds, few are castwithout some reference to the law. Even long-term ex-changes, involving complex issues and presenting draftingdifficulties, are structured and employ legal contracts.

The contradiction of emergent governance theory versusempirical (and anecdotal) observation leads to the followingquestions: What function does the law play in goveming on-going exchanges, and in what capacity are nonlegal ap-proaches employed for regulating these relationships? I ex-amine legal and nonlegal govemance approaches and inves-tigate their regulatory role across the process of exchange. Isuggest that contract law is well suited for goveming issuesassociated with the transaction or fomiation and documen-tation of a legally enforceable exchange. However, for sup-porting negotiations leading to and the subsequent adminis-tration of an ongoing exchange, the law is found to providelimited safeguards. For these process stages, the role of non-legal safeguards are examined. A model that characterizesthe conceptual interplay of legal and nonlegal govemanceapproaches in exchange is proposed. 1 report on the theoret-ical foundations underlying development of this model andimplications extending to the management and research ofexchange relationships and public policy.

BackgroundToday, many social scientists, including those in marketing,and a growing number of legal scholars view exchange as acomplex and dynamic affair. Long-standing notions of ex-change as limited to simple, one-time bargaining events be-tween independent actors pursuing individual outcomes

246 Joumal of Public Policy & MarketingVol. 13 (2)

Fall 1994, 246-258

Journal of Public Policy & Marketing 247

have given way to newer perspectives. More recent concep-tions now embrace exchange as a complicated value-creat-ing process covering multiple issues and involving extendedtime periods (cf. Houston and Gassemheimer 1987). As oneleading commentator (Famsworth 1987, p. 218) has de-scribed the initial stage of this process:

Ours is an era of 'deals'.... The terms [of which] are reached hynegotiations, usually face-to-face over considerable periods oftime and often involving corporate officers, bankers, engineers,accountants, lawyers, and others.... During ihe negotiation ofsuch deals there is often no offer or counter-offer for either partyto accept, but rather a gradual process in which agreements arereached piecemeal in several 'rounds' with a succession ofdrafts.

Rubric for these exchanges includes terms such as "sym-biotic" marketing (Varadarajan and Rajaratnam 1986), "do-mesticated markets" (Amdt 1979), "relational exchanges"(Goetz and Scott 1981; Goldberg 1979; Macneil 1980), and"networking" (Ford 1980) and has been reviewed elsewhere(see Gundlach and Murphy 1993; Webster 1992). Each re-flects the conception that an exchange relationship amongactors differs markedly from a discrete transaction.'

Exchange as ProcessViewing exchange as involving a complicated intertemporalrelationship between individual actors in pursuit of benefi-cial outcomes has prompted development of various con-ceptions of the exchange process. Indeed, Commons (1950,p. 126), writing in the economics literature, first proposedthat "all economic activity goes through three stages—ne-gotiation, transaction, and administration." Adopting thisperspective, various marketing authors have explored relat-ed processes for differing types of exchanges (see Table I).Dwyer, Schurr, and Oh (1987), for example, suggest long-term marketing exchanges progress through transitionalphases of awareness —* exploration —» expansion —> com-mitment —> dissolution. In related work, Jackson (1985) dis-tinguishes industrial transactions from relationship market-ing. Examining just-in-time exchanges in market channel ar-rangements, Frazier, Spekman, and O'Neal (1988) identifythree stages: interest —> initiation/rejection -> implementa-tion/review. Ford (1980) portrays the evolution of interna-tional industrial buyer-seller relationships as encompassingprerelationship -> early —> development -^ long-term —*final stages.

In the legal literature, similar conceptions of the exchangeprocess have developed. For example, Narasimhan (1989, p.1080) notes;

'Following Webster's (1992) range of exchange relationships (e.g.. trans-aciions —> repeated transactions -> long-term relationships —> buyer-sellerpartnerships —» strategic alliances —»joint ventures —t network organiza-tions —> vertical integration) and for purposes of discussion, joint ventureforms of exchange are differentiated from other relationships in this study.Joint venture relationships possess many attributes commonly associatedwith more hierarchical associations (e.g.. "a new firm is created, with itsown capital sinicture. as well as sharing of olher resources ... established toexist in perpetuity, though ihe founding partners may subsequently changetheir ownership participation", p. 8). In law. these associations are retjuiredto file partnership tax returns and abide by many of the other legal aspectsof partnership associations (e.g.. stringent disclosure, fiduciary standardsfor participants). In these respects, joini ventures differ from less integrat-ed forms of exchange addressed here.

Consider a contractual relationship between two parties as ilevolves over time. First, the parties initiate their relationship bynegotiating and entering their first contract. Second, they enterthe period during which they perform their agreement. Finally,they negotiate again and coordinate the terms under which theywill continue their relationship.

Reiatedfy, both Shell (1991) and Farnsworth (1987) viewexchange as involving precontractual, contractual, and post-contractual periods. While focusing on the legal aspects ofexchange, these descriptions parallel those found in market-ing and reflect the ongoing nature of modern exchange.

Following Commons (1950) and for purposes of thisstudy, the descriptions portraying the process of exchangeare summarily characterized as embracing three stages: Ex-change negotiation —> Exchange transaction -» Exchangeadministration (see Table 1). Synthesizing the extant litera-ture and recognizing the continuous nature of this process,the negotiation stage is engendered to reflect initial aware-ness, interest, and preliminary interactions and explorationsof exchange development in the precontractual period. Thetransaction stage is captured within the second stage and in-cludes formalization and documentation of the exchangeand its attendant instruments to fiilfiU requirements under alegal contract or other arrangement. Performance and main-tenance of the exchange, potentially leading to repeated in-teractions, further commitment and long-term stability (ordissolution) is depicted in the administration stage. Ofcourse, in practice, distinguishing each stage is difficult. Theadvantage of characterizing each stage resides in its utilityfor theorizing across the process of exchange.

OpportunismViewing exchange as a nondiscrete event involving partici-pants negotiating toward agreement, engaging in a foniialtransaction, and administering their association over timehighlights the process nature of exchange. Such a perspec-tive envisions a complex affair with participants perfonningmultiple tasks in sequential fashion (e.g., one party per-forming in part or in full before the other executes its side ofthe bargain). Although it provides many advantages, thisprocess also creates unfortunate incentives for the partici-pants (Shell 1991). For example, having received its benefitfrom the bargain, the party who is to perform last may betempted to renege on its obligation. Law and marketingscholars describe the conduct of the reneging party in thesesituations as opportunism (cf Williamson 1975).-

The presence of differing incentives can contribute to op-portunistic conduct. In economic terms, an exchange rela-tionship can be viewed as a continuing stream of benefitsand costs, with each party incurring costs and receiving ben-efits at various times but witb timing of these streams in-

has several meanings. According to Muris (1981.p. 521), opportunistic behavior occurs when one party "behaves contrary lothe other party's understanding of their contract, but not necessarily con-trary to the agreement's explicit terms, leading to a transfer of weallh (i.e.,value) from the other party lo the performer." Such behavior may also bemore overt, and involve strategic "self-interest seeking with guile"(Williamson 1975. p. 6) and even deceit (Macneil 1982). Goetz and Scott(1981, p. 1101) suggest an expansive definition to include "bluffs, threats,and games of 'chicken' designed to exploit another party's presumed bar-gaining disadvantage."

248 Exchange Governance

Tible 1. Marketing and Law Literature on the Process of Exchange

Literature Negotiation TVansaction Administration

Dwyer, Schurr, and Oh Awarenexs. Parties be- Exploration. Parties in-(1987) come conscious of the teract and consider ex-

feasibility of exchange change obligations,between one another. benefits, and burdens.

Jackson (1985) Similar to Dwyer,Schurr. and Oh (1987)

Expansion. Relation-ship continues toevolve and extend.

Comm itment/Oissolu •tion. Implicit and ex-plicit dedication of re-lational continuity orthe potential of disen-gagement.

Frazier, Spekman, andO'Neil(I988)

Ford (1980)

Narasimhan (1989)

Shell (1991)

Famsworth (1987)

Interest. Recognition offactors promotive (de-motive) of a just-in-time (JiT) arrange-ment.

Prerelationxhip. Evalu-ation of a new or po-tential supplier.

Negotiation. Prelimi-nary dealings leadingto formation of a con-tract.

Precontractual. Multi-stage process in whichparticipants test andleam about one anotherand issues involved inaji exchange.

Similar to Shell(l991).

In itiation/Rejection.Identification of issuesunderlying formal(dis)establishment ofJIT arrangement.

Early. Preliminary ne-gotiations and specifi-cations leading to sam-ple delivery.

Implemeniaiion/Review.Administration and re-view of JIT arrange-ment.

Development. Signingof formal contracts andbuildup of delivery.

Contract. Formation ofa legally enforceablecontract.

Contractual. Formationof a legally enforceablecontract.

term. Administra-tion of relationshipleading to recognitionof parties' mutual im-portance.

Performance. Com pie*tion of the agreed-toterms of the contract.

Postcontractual. Per-formance of an ex-change under the tennsof the contract andcontinuing evolution ofthe relationship.

Final. Relaiionshipevolves toward stabilityover long periods oftime.

Continuance. Subse-quent and continuingexchange interaction.

variably not coinciding. If at any point in the relationship,one party's anticipated costs substantially exceed anticipat-ed benefits, the party is vulnerable to the strategic self-inter-est (i.e., opportunism) of an exchange partner—particularlywhen the partner's benefits exceed costs (Goldberg 1979).The following case example illustrates this potential {Wis-consin Knife Works v. National Metal Crafters 1986,p. 1285):

If A contracts to build a highly idiosyticratic gazebo for B. pay-ment due on completion, and when A completes the gazebo Brefuses to pay, A may be in a bind—since the resale value of thegazebo may be much less than A's cost—except for his tight tosue B for the price. Even then, a right to sue for breach of con-tract, heing costly to enforce, is not a completely adequate rem-edy. B might, therefore, go to A and say, 'If you don't reduceyour price I'll refuse to pay and put you to the expense of suit,'and A might knuckle under.

Opportunistic conduct can occur during preliminary ne-gotiations, at the transaction stage, and across the adminis-tration of an exchange (Williamson, Wachter, and Harris1975). For example, during negotiations, one party may in-tentionally deceive another or merely fail to disclose criticalinfonnation to the detriment of the other. Similarly, oneparty may give up proprietary infonnation or commit re-sources to performance, which are then appropriated by the

other party without consummation of the exchange.^ Trans-action-oriented opportunism involves conduct violative ofthe formal requirements, documentation, or procedures pro-viding legal structure and status to an exchange. Examplesrange from self-interest conduct relating to the capacity ofparties to engage in an exchange (e.g., principal-agent is-sues, minors) to fraud or forgery in exchange documents toopportunism extending from procedural injustices (e.g.,statute of fraud issues). For exchange adtninistration, as il-lustrated in the previously described case, a party may at-tempt to extract modifications to an existing agreement togain disproportionately from an established relationship(Narasimhan 1989). When a partner has dedicated assets toan exchange that have limited application in other circum-stances (e.g., specialized facilities, trained salespeople, pro-

^Disclosure of information or engaging in preperformance are common-place among both business and consumer exchanges and can include dis-closure of. for example, product design specifications, trade secrels. or mar-ket research. Parties may also commit resources toward performancethrough the promise of specific assets and services. Various incentives maymotivate such commitment. Time may be of the essence in some exchangesand require one party to begin performance early. Temporal opportunitiesfor obtaining needed resources (i.e.. price deals) may lead to early perfor-mance. Parties may also employ early assignment of resources as a "test"of each side's commitment and abilities. Finally, one party may strategical-ly exert pressure to obtain a partner's early performance.

Joumal of Public Policy & Marketing 249

motions directed toward a unique target market), such "ex-torted" modifications may result {cf. Anderson 1988). Aparty may also simply shirk its responsibility or otherwisenot meet its obligations (Muris 198!)-

Governance Approaches in ExchangeGiven that the potential of opportunistic conduct exists invirtually all exchanges, parties involved in exchange neces-sarily evolve governance approaches to regulate one anoth-er's conduct. Governance has heen defined as a "mode of or-ganizing transactions" (Williamson and Ouchi 1981) and"the institutional framework in which contracts (i.e., ex-changes) are initiated, negotiated, monitored, adapted, andtemiinated" (Palay 1985. p. 156). Goldherg (1979) suggeststhat governance includes "mechanisms." "tools," "devices,"and "tactics" for preserving an exchange. In this way, gov-ernance depicts an encompassing phenomenon characteriz-ing the nature and approaches employed by parties to orga-nize and regulate exchange conduct effectively.

Legal ApproachesA primary role of contract law as a mechanism of gover-nance is to deter opportunistic behavior (Muris 1985) andenhance the efficiency of an exchange relationship (Palay1985). The law of contract attempts to guard against oppor-tunism hy providing legally enforceable assurances to par-ties that their partners can be held accountable in the eventthat they behave opportunistically. Accountability reducesthe risk of entering exchange transactions and facilitates anatmosphere of confidence conducive to the establishment ofan ongoing relationship.

As a developed body of law, three legal contract traditionscan be distinguished—classical contract law, neoclassicalcontract lavy and relational contracting (Calamari and Peril-lo 1987). The dominant of the three traditions is classicalcontract law. or doctrine developed in the common law (caselaw). For the most part, these principles conceive and de-limit exchange to that of a zero-sum, single-issue "market"transaction. Describing this tradition, a leading contractscholar writes (Williamson 1979, p. 236-37);

For one thing, the identity of the parties to a transaction is treat-ed as irrelevant.... Second, the nature of the agreement is care-fully delimited, and the tnore fonnal features govern when for-mal (for example, written) and informal (for example, oral)temis are contested. Third, remedies are tiarrowly prescribedsuch that, should the initial presentation fail to materialize he-cause of nonperformance. the consequences are relatively pre-dictable from the beginning and are not open ended.... The em-phasis, thus, is on legal rules, formal documents, and self-liqui-dating transactions.

Because the realities of many exchange relationships failto fit in the classical contracting scheme, an emergent formhas developed in contract law's areas of specialty: Neoclas-sical contract law represents a tnore modern perspective andencompasses specific modifications to existing contractprinciples found across, for example, commercial law, war-ranty law, and some aspects of tort law. Some of these mod-ifications are statutory in nature (e.g.. Uniform CommercialCode [UCC]), and others are reflected in the common law.Neoclassical contract law has developed in response to the

problems inherent in many non-market-based exchanges.These include the inability of partners to anticipate and in-corporate in tbeir agreements future contingencies and nec-essary adaptations. Opportunistic outcomes resulting fromtbese conditions bas also motivated developments under theneoclassical paradigm.

Relational contracting represents a "spin-off ... from theclassical, and ... neoclassical contract law systetn(s)" (Mac-neil 1978, p. 885). At its core, relational contract holds thatall social interaction takes place within an elaborate networkof relationships (Goldberg 1979). Composed of btnh legaland extra-legal associations, this network provides the regu-latory standards and values through wbicb the relationship isconducted. Macneil (1980) suggests that these standards andvalues manifest through social norms. Others bave noted thewide variety of extra-legal devices available for regulatingexchange (discussed subsequently). In contracting terms,the law is more relational to tbe extent that it formally in-corporates these devices in its rules and requirements (Goetzand Scott 1981). As a body of law. relational contracting isbest represented in the law of business organizations (i.e.,corporate, partnership, joint venture, and principal-agentlaw). The underlying structure of these areas of contract lawembraces relational principles (e.g., duties of loyalty, dis-closure, responsibility).*

Relational Developments and Adaptations inContract LawConventional legal contract doctrine has yet to fully em-brace relational contracting as a body of law. The difficultyof preserving infonnal aspects of an exchange to standardrules and embracing fully in these rules the nature of inde-pendent actors engaging in ongoing relationships has under-mined this progression. Its emerging influence, however, isdetectable within some areas of the law. A common theme isreference and incorporation of extra-legal governance de-vices as the basis for legal rights in an exchange and ac-knowledgment of the nondiscrete nature of many ex-changes. Examples of tbese developments and adaptationsare provided subsequently.

Common Law of ContractVarious common law doctrines in contract bave evolved toreflect an increasing appreciation for the relational and on-going nature (i.e., negotiation, transaction and administra-tion stages) of sotne exchanges. The doctrine of promissoryestoppel, for example, arises when one party makes apromise on which another reasonably relies, to its detriment.In contrast to earlier interpretations, its modem applicationestops a promisor from denying liability extending from apromise made during preliminary negotiations (Metzger andPhillips 1983). In addition, the doctrine of unjust enrichmentgrants damages wben one party's partial performance con-fers a benefit on anotber to the detriment of the performingparty. For ongoing exchanges, this doctrine has been con-

''An oflen-cited case in terms of joint venture law states, "Joint adven-turers, hke copartners, owe lo one another.... the duty of the finest loyalty"{Meinhard v. Salmon t928. p. 463-64). Other examples can be identifiedthrough examination of the tJniform Partnership Act (1969) and particularstate laws for corporations.

250 Exchange Governance

strued broadly to include "unjust enrichment" occurringduring Initial negotiations as well as the subsequent admin-istration of an exchange (Famsworth !987). Wben partiesagree to negotiate in contemplation of an exchange and oneparty breaks tbe agreement, some courts now invoke a rulethat requires parties to bargain in good faith. In this way. tbelaw attempts to provide greater governance of negotiations(Dugdale and Lowe 1976). Similarly, if parties wisb to mod-ify their agreements during administration of an exchange.in contrast to classic doctrine, modem courts now allowthem to do so if done in good faith (Narasimhan 1987). Con-temporary modification doctrine emphasizes the heneficialeffects of adjustments when circumstances not contemplat-ed exist (Graham and Peirce 1989).

Other relational adaptations in the common law can befound in doctrines addressing remedies in the event of non-performance. Tbese doctrines safeguard administration ofan exchange by awarding damages or requiring specific per-formance. The most likely remedy for nonperformance ismoney compensation adequate to the value of performance.Unfortunately, in ongoing exchanges, the costs of oppor-tunism may be too difficult to calculate or extend beyond tbesimple value of tbe exchange. As a result, rules allowing par-ties to agree to reasonable liquidated damages for extraordi-nary expenses have developed. Recognizing the limitationsof damage awards for nonperformance. rules allowing an in-jured party to instigate an action for specific performancehave also developed for unique goods. In theory, by forcinga breaching party to perform as agreed, the full value of thecontract is safeguarded (Linzer 1981). Finally, for perfor-mance-related opportunism by an injured party, tbe rule ofavoidable consequences is employed for assessing the par-ties' reasonahle efforts in mitigating damages extendingfrom a partner's nonperformance. Its application precludesan injured party from passively incurring losses reasonablyavoided or from actively increasing such losses when pru-dence would require an adjustment {Goetz and Scott 1983).

Sales IMWFor the sale of goods, the norm-ba.sed standard of "goodfaith" and "reasonable commercial standards of fair dealingin the trade" applies to all exchanges regulated under theUCC (1978, Section 2-103). This standard extends to nego-tiations, the transaction and subsequent administration of anexchange for the sale of goods. In addition, gap filler provi-sions use prior dealings between parties and customarypractices for completing omitted contract terms thus invok-ing historical and norm-based devices for governing conduct(Sections 2-204(3) and 2-305-2-311). Under these sections,contract terms not specified (e.g., as found in requirementsand output contracts and some option contracts) may beagreed to and incorporated into an exchange on tbe basis ofprior dealings and customs in business even after a contractbas been formed. A contract may even be concluded eventhough its price, place of delivery, time of performance, andother particulars have not been settled. The UCC also allowsexplicit modification of existing relationships—"an agree-ment modifying a contract within this Article needs no con-sideration (additional benefit or burden inducing a party tocontract) to be binding" (Section 2- 209(1)). Finally, when a

party repudiates its prospective duty to perform under theUCC, a partner may seek damages immediately ralber thanwaiting for an actual breach of an agreement (Section 2-712). Thus, tbe UCC recognizes the varying nature of op-portunism across the exchange process.

Other LawModem warranty law. both statutory (i.e., UCC) and com-mon law, also incorporates relational aspects. A warranty ei-ther expressed or implied is given as a guarantee of quality,condition, title, or Ihe like. Thus, to some degree, it facili-tates continued exchange by providing assurances and re-course to purchasing parlies. Relatedly. tort law includessimilarly directed actions, for example, interfering with anopportunity to contract (i.e., interference witb prospectiveadvantage), fraudulent promises made during negotiations(i.e., promissory fraud), and inducing a party to breacb anongoing exchange (i.e., interference with contractual rela-tions) (Keeton et al. 1984). Finally, as mentioned, joint ven-ture law, which applies to some strategic alliances, involvesstrict duties of loyalty and disclosure. Together, these exam-ples illustrate the law's attempt to address and incorporaterelational considerations in exchange.

Shortcomings of Contract LawDespite these developments and adaptations, the generalconsensus of many legal scholars is that the extent to whichmodem contract law bas conceptually embraced tbe rela-tional aspects of exchange is limited (Narasimhan 1989). Atleast one scholar bas even prophesied the "death of contract"for regulating exchange because of the increasing number ofcases in which the law bas not been enforced—partially dueto its contrast with tbe realities of modern exchange(Gilmore 1974).

In part, the shortcomings of contract law can be attribut-ed to its legacy of viewing exchange as a discrete event ascontrasted with the process nature of modem exchange rela-tionships. Describing this, one legal scholar has observed(Naraslmban 1989, p. 1077):

Contract law has tended to draw sharp distinctions between ...contract(s) in which long term relational dependencies are rec-ognized and ... contracts between the same parties ... in whichsuch dependencies are not recognized.

The author goes on to characterize the difficulties inherentin contract law for goveming exchanges involving long-termdependencies.

Complicating this discord is the fact that those cbangesand adaptations that bave evolved in the law are arguably in-adequate to the task. Furthemiore, in many instances thesechanges represent exceptions to the general framework ofcontract law and often contrast with more basic principles.For example, joint venture law. which has developed main-ly as a special form of partnership law, continues to viewventures and other fomis of strategic partnering and al-liances as isolated transactions rather tban as ongoing long-term exchanges (Bromberg and Ribstein 1988). Joint ven-ture common law doctrine, wbich provides strict fiduciarydisclosure responsibilities to eacb partner, bas also been ar-gued to be "unrealistic and overly burdensome" to partici-

Journal of PubUc Policy & Marketing 251

pants, thus inhibiting some long-term ventures (Vestal 1991,p. 733).

As an example of the excepting nature of some doctrinaldevelopment, tbe modem principle of promissory estoppeloverrides and is in conflict with other basic contract princi-ples such as acceptance, consideration, and other rules thatallow parties to escape liability for promises made. Similar-ly, the modem doctrine of modification conllicts with basicprinciples regarding tbe definiteness of a contract. Tensionbetween the modem (i.e., relational) forms of tbese doc-trines and traditional law complicates their use and bas in-bibited the law's progression toward recognition of the pro-cess aspects of exchange relationships.

Application issues also limit the ability of the law to gov-ern exchange relationships. For example, as a basis of re-covery, tbe doctrine of unjust enrichment is constrained tocircumstances in which a party's actions actually benefit an-other. During negotiations, however, many actions may notdirectly benefit a prospective exchange partner; however,these actions may yield real costs to a performing party. Forpromises during negotiations that appear to violate the mlcof good faith, difficulties in proving "bad" faith abound. Theavailability of remedial measures is also limited. For exam-ple, requiring specific performance after the agreed-to timeof performance may not provide adequate compensationwben the value of an exchange has changed. As to this po-tential. Robison (1983, p. 723) notes:

Extortion (i.e. opportunism) is often possihle only because thepromised performance is both immediately due and immediate-ly necessary to avoid harm to the recipient. Thus, only the per-formance itself, close to the promised time, can avoid the harmthat makes specific performance so attractive to the recipientand to a sensitive court. But an order of the specific performancethat is months, if not years, in the future may he valueless.

Other issues include tbe reluctance of many courts to super-vise a specific performance order and grant sucb an actiontbat eliminates a defendant's right to a jury trial (Linzer1981). Finally, tbe rule of avoidable consequences is a "de-fense" and may not be called on in an affirmative sense. Inapplication, courts often do not require a potential mitigatorto take action prior to breacb. Tbis reactive, as opposed toproactive, policy requires that opportunism occur before therule can be applied (Goetz and Scott 1983).

For these reasons, contract law as a basis for govemingexchange in the negotiation and administration stages re-mains problematic. As one judge relegated tbe proper role oflaw in the negotiation stage {Feldman v. Allegheny Interna-tional Inc. 1988, p. 1223):

In a business transaction both sides presumably try to get thebest of the deal. That is the essence of bargaining and the freemarket.... No particular demand in negotiations could he termeddishonest, even if it seemed outrageous to the other party. Theproper recourse is to walk away from the bargaining table, notto sure for 'bad faith' in negotiations.

Nonlegal ApproachesGiven the conceptual and pragmatic limits of contract law,parties often evolve altemative approaches for govemingsome stages of their exchange relationships. Examination ofnonlegal approaches for regulating conduct reveals tbeir ef-

fective nature for goveming negotiations and the adminis-tration of exchange. Allbougb not equivocal, these ap-proaches safeguard against the hazards of opportunism inways not provided through the law.''

Two widely acknowledged alternatives to the legal regu-lation of exchange vis-^-vis traditional contract law involveorganizing it intemally (i.e.. integration) or quasi-intemaily(i.e., joint venture entity) or relying on external dispute set-tling mechanisms (i.e., arbitration or mediation). Quasi-in-temal regulation of exchange has been distinguished as agovemance approach and extensive focus in marketinggiven to ownership integration tbrougb analysis of transac-tion costs.^ Arbitration or mediation, though effective, re-quires third-party intervention and may be available onlyunder limited circumstances. As a result, these approachesare not explored here. Rather, focus is given to approachesthat emphasize relational devices for deterring opp(.>rtunisticconduct, for example, self-interest bonds, social norms,etbics, and reputational considerations. These approacbesare readily available to exchange participants and provideflexibility not found in tbe law. Rather than relying on thethreat of legal recourse for their credibility, each emphasizesthe relational consequences of opportunism.

BondsGoveming an exchange through use of a bond involves tbeposting of a valued asset to be sacrificed in tbe event tbat aparty acts opportunistically (Muris 1981). Bonds may bepledged voluntarily by an exchange partner (e.g., voluntarypledges of specialized facilities, dedicated or speciallytrained personnel, proprietary infomiation) or required as acondition of exchange (e.g., conditional deposits, escrows,collateral, performance bonds). Requiring a "hostage" orsome collateral yields similar incentives as voluntarilypledging a bond (Schelling 1956). Often a more powerfulparty may extract such demands during negotiations. Othercircumstances in which bonds provide useful governance in-clude exchanges in which an established basis for oppor-tunism exists (e.g.. franchisee systems, exchanges involving

'It is important to pt)itit out that some nonlegal governance approachesmay be given legal significance and enforced through the law. For example,the law of secured transactions contained in Arlicle 9 of the UCC address-es the creation and protection of a lender's security interest when extendingcredit. Thus, the law addresses particular forms of bonds, provided by ex-changing partners. In addition, warranty law invokes implicit and explicitguarantees of quality, fitness, and so on. which act as governance bonds.Property law provides comparable protection in the conveyance of title toland and personal property. Finally, as mentioned previously, the UCC callson "good faith" and "reasonable commercial standards" in its regulation ofexchange, thus addressing social norms and ethics. Moreover, joint venturelaw invokes strict standards of disclosure and loyalty for some strategic al-liances of joint venture exchanges. The discussion in this section focuses onthe relational versus legal nature atid consequences of these govemanceapproaches.

^In marketing, several scholars have empirically investigated firms'choices among ownership integration and markets. Analysis in this contexthas aided in the understanding of "make or buy" decisions (Anderson 1985;Anderson and Weitz 1983), sales organization decisions (Anderson andOliver 1987; John and Weitz 1990), structuring of distribution channel andpurchasing relationships (Dwyer. Scburr. and Oh 1987; Heide and John1988. 1990, 1992; Noordewier, John, and Nevin 1990). and decisions re-lating to market entry (Anderson and Coughlan 1987; Klein. Frazier, andRoth 1990). Recent work by Heide (1994) contemplates a trichotomy ofgovemance, including market, unilateral/hierarcbal, and bilateral.

252 Exchange Govemance

dedicated assets, reciprocity arrangements, and some prod-uct exchanges; Williamson 1983). As Klein (1980, p. 359)puts il, franchisers can better

assure quality by requiring franchisee investments in specific ...assets that upon termination imply a capital loss penalty largerthan can he ohtained by the franchisee if he cheats. For exam-ple, the franchiser may require franchisees to rent from themshort term (rather than own) the land upon which their outlet islocated. This lease arrangement creates a situation where termi-nation can require the franchisee to move and thereby impose acapital loss on him up to the amount of his initial non-salvage-able investment. Hence a form of collateral to deter franchiseecheating is created.

Some bonds are less tangible than others—the valuedright of repossession in installment contracts, a franchisee'sright to revoke a trademark for substandard practices, war-ranties in sales transactions, and a bank's right to cut off abusiness's line of credit or call in loans for payment impro-prieties. An often-overlooked bond, yet common and of pri-mary importance in exchange relationships, is the value offuture dealings. In each case, effective incentives—namely,the bond's value—constrain opportunism through creatingself-interest consequences for participant's actions(Williamson 1983).

A variety of explanations can be oftered for giving up (orrequiring) a valued asset to be forfeited in the event of op-portunism (Chamy 1990). In the event that a buyer is riskadverse, posting a bond may provide sufficient assurance foran exchange to occur that would not otherwise, More di-rectly, a bond can be used to reallocate risk from one party(e.g., buyer) to another (e.g., seller), therefore altering thevalue of an exchange. A bond can also enhance the credibil-ity of information provided by exchanging parties. Incen-tives to exaggerate claims concerning a product are likely tobe tempered when a bond is posted. Bonds can be employedto induce future sales. Given a product requiring specializedmaintenance or parts, a bond may provide sufficient induce-ment to buy—especially when it involves future service orprices.

The govemance properties of bonds depends on the valueof the posted asset. In theory, bonds safeguard exchangewhen their value exceeds the benefits to be obtained fromengaging in opportunism. One difficulty, however, relates tovaluing these benefits and administratively setting a pre-transaction bond. The symmetry of bonds between partici-pants is also important. In bilateral exchange (i.e., dual obli-gations), jom/ bonds may be required to deter opportunism(cf. Anderson and Weitz 1992). Less-than-symmetric bondscan actually increase a more committed party's (i.e., oneposting a more valuable bond) vulnerability to opportunismby a less obligated partner.

Social Norms and Ethical SanctionsParties can also rely on social norms and ethical sanctionsfor deterring opportunism. Social norms can include (1)long-standing industry or trade association standards andpractices, (2) those specific to an exchange relationship, or(3) in the case of both business and consumer exchanges,standards of conduct developed through personal relation-ships. In the case of industry nonns, Thomas and Soldow(1988) suggest that "rules," or interaction pattems, evolve to

link and guide the behavior of firms in a competitive set. Forspecific exchange relationships, parties often rely on the cul-tivation of infonnal rules and norms developed throughrepetitive exchange to guide their conduct (Macaulay 1963).Social norms as "principles of right action" (Macneil 1980,p. 38) or "expectations about behavior that are at least par-tially shared" (Heide and John 1992, p. 34) bind exchangepartners and serve lo guide, control, and regulate acceptablebehavior. Personal relationships can also result in standardsof conduct. Friendship ties have long been an important as-pect of exchange in many international settings.

Characterizing the overall nature of these approaches as"relational contracting," Williamson (1979, p. 238, note 2)notes:

Relational contracting involves those contracts found in rela-tions that take on the properties of "a minisociety with a vastarray of norms heyond those centered on the exctiange and itsimmediate processes.... lT|he reference point under a tnily rela-tional approach is the 'entire relation as it has developed ...[through] time.'"

For each approach, opportunistic tendencies are deterredthrough reference to social affiliations. The "fundamentalinsight of relational contracting theory [is] that when a con-tract is embedded within an identifiable relationship, ... con-tractual obligations are often modified, supplemented orcompletely supplanted by the norms of the ongoing rela-tion" (Hadfield 1990, p. 929).

The govemance properties of social norms vary depend-ing on their origin and the exchange process. In the case ofindustry or trade standards, their application permeates theentire process and safeguards each stage. Social norms orig-inating from within a relationship, in contrast, provide min-imal safeguards during initial negotiations because partiespossess a limited history of interaction—a requisite of normdevelopment. The safeguarding nature of these social normsincreases as the parties actively engage one another.

The capacity for industry and relationship-specific normsto preserve and safeguard exchange is especially notable.According to Heide and John (1992, p. 35):

A defining characteristic of norms is their ability to specify per-missible limits on behavior... Norms thus serve as a general pro-tective device against deviant behavior. A particular property ofrelational norms is Iheir prescription of behaviors directed to-ward maintaining the system or relationship as a whole and cur-tailing behavior promoting the goals of the individual parties...IRJelational norms constitute a safeguard against exploitativeuse of decision rights.

Exchange parties are often familiar with the standard usagesof their trade and can apply them to a wide variety of cir-cumstances as a matter of course. In research addressing theimpact of stKial norms on facets of exchange petfomiance,Noordewier, John, and Nevin (1990) report results that indi-cate, under uncertainty, original equipment manufacttirerpurchase performance increases when relational elements ofsocial norms are present. Sitnilarly, Heide and John (1992)find that social norms play a significant role in implement-ing efficient exchange relationships. Heide (1994) furtheridentifies the association of greater norms of flexibility inhighly interdependent relationships. See also Boyle and col-leagues (1992) and Kaufmann and Stem (1988).

Journal of Public Policy & Marketing 253

Similar to social norms, safeguards emanating from moralor ethical considerations also apply across the exchange pro-cess. These govemance mechanisms, however, differ in theirorigin from social norms. Ethics and moral values transcendindustry or group-generated expectations, relying instead onmoral philosophy. Ethics involve perceptions of right andwrong and require that individuals behave according to therules of moral philosophy.^ Many organizations have pub-lished guidelines for ethical behavior. Some corporate cul-tures possess strong moral foundations. Work by Gundlachand Murphy (1993) examines ethics as a govemance ap-proach within exchange. They propose the increasing sig-nificance of ethical and morally based values such as trust,equity, responsibility, and commitment for long-termexchanges.

ReputationConcern for the consequences of a sullied reputation mayalso deter opportunism. According to Coase (1988, p. 44),"the propensity for opportunistic behavior is usually effec-tively checked by the need to take account of the effect ofthe firm's actions on future business." The basis of reputa-tion providing effective govemance stems from what Weiz-sacker (1981, p. 72-73) refers to as the "extrapolationprinciple":

The phenomenon that people extrapolate the behavior of othersfrom past observations and that this extrapolation is self-stabi-lizing, because it provides an incentive for others to live up tothese expectations.... By observing others' behavior in the past,one can fairly confidently predict their behavior in the futurewithout incurring further costs.

Many exchanges incorporate reputational considerations assafeguards. Linking one exchange to another or engaging inreciprocity arrangements are exchanges that depend on rep-utationai effects. Other examples include family brandingstrategies, trademarks, and, for consumers, credit ratings.

The govemance properties of reputation depend on thenature of infonnation available to participants. Communica-tion of a reputation for taking advantage of exchange part-ners provides some incentive for not engaging in oppor-tunistic conduct. The extent of communicability amongtrading partners, however, affects the degree to which repu-talional sentiments will be known and therefore employed.Muris (1981, p. 527) notes, "reputation provides little deter-rent when potential opportunists can conceal their actions."Deception or extreme misrepresentation by a seller is likelyto be communicated more readily among prospective buyersthan are more subtle forms of opportunism.

Access to information regarding reputations can be ob-tained from past partners or competitors and is more acces-sible in markets containing relatively few participants withfrequent contact. The advent of increasingly sophisticatedinformational systems through which data (e.g., back-ground, credit history, product quality) are available en-hances this govemance approach. Of course, considerationof the data source should be incorporated in interpreting

•"in marketing, several authors have applied ethical theories includingutilitarianism, deontology, and virtue ethics lo marketing (Ferrell. Gre-sham. and Fraedrich 1985. 1989; Hunt and Vitell 1986; Robin and Reiden-bach 1987: Williams and Murphy 1990).

such information. Past dealings and other more subjectiveaspects of reputation should not be overlooked. Knowledgeof past interactions and relationship attributes such as a rep-utation for flexibility, solidarity, and the like may provide in-sight as to future conduct. In this respect, reputational mon-itoring may provide an effective basis for goveming futureintrapartner exchanges. Given past dealings, access to thisinfomiation is often readily available.

A particular form of reputation relates to the trustworthi-ness of an exchange party and the benefits of engaging trust-ing partners. Often confused as a social norm, trust relates tothe belief, sentiment, or expectation of an exchange part-ner's trustworthiness that results from the partner's exper-tise, reliability, or intentionality (Blau 1964; Pruitt 1981).On tmst as a form of govemance, Robison (1983. p. 731)notes, parties "can affect the risk of becoming victims of ex-tortion (i.e., opportunism) by choosing tmstworlhy part-ners." Banfield (1958) argues that the lack of trust is indeedone of the causes of economic (i.e.. exchange)underdevelopment.

Relatedly, the prospective loss of psychic or social bene-fits (e.g., self-esteem, friendships, business contacts) mayprovide similar regulation of participants' conduct. Shell(1991, p. 394) notes:

An unsavory husinessperson may be snubbed at the local club orsuffer pangs of guilt during the Sunday sermon. Encouragingtrust among workers or long-term customers is one function ofthe 'corporate culture' of firms and of the feeling of responsibil-ity to clientele that may develop at schools, banks, or other ...institutions.

Thus, trust provides an operative governance approach thatdiffers from social norms. Together, noniegal and legal gov-emance approaches deter opportunism and enhance ex-change efficiency. Their operation and relative importanceacross the exchange process, however, varies depending onthe stage involved.

The Role of Legal and NonlegalGovernance Approaches Across theExchange ProcessAdopting the perspective that exchange govemance repre-sents a complex adaptation of both legal and nonlegal ap-proaches, the theme espoused here is that nonlegal ap-proaches govem exchange through means not provided inthe law. In particular, these approaches provide operativegovemance across those stages of the exchange process towhich the law furnishes few safeguards. Figure 1 illustratesthe role of both legal contract and nonlegal govemance ap-proaches across the process of exchange. The law is shownto provide a limited safeguarding role during the negotiationand administration of exchange. In contrast, given the requi-site legal formality of the transaction stage, legal contractmechanisms are portrayed as the primary govemance ap-proach. Nonlegal approaches are shown to provide a keysafeguarding role during negotiations and the administrationof an exchange wherein the law provides relatively limitedsupport. The interplay of the approaches as depicted in Fig-ure I enables coordinated govemance across the exchangeprocess.

254 Exchange Govemance

Figure 1. Conceptual Role of Governance Approaches Across the Exchange Process

Regulation ofExchange

High NonlegalApproaches

LegalApproaches

Negotiation Transaction Administration

Exchange Process

Negotiation StageFor negotiations leading to exchange, with some exception,contract law's image of bargaining as that of a simple swapof offers and counteroffers followed by acceptance or rejec-tion differs frotn modem negotiations and suggests its limit-ed role. Characterizing classical negotiation legal doctrine.Shell (1991, p. 232-33) writes:

The principal questions addressed by these doctrines arcwhether and when a contract has been formed. This focus on theexchange of discrete expressions of intent ... emphasizes situa-tions in which parties engage in zero-sum, single-issue 'posi-tional bargaining.'

As a general rule, "a party to pre-exchange negotiations maybreak them off without liability at any time and for any rea-son—a change of heart, a change of circumstances, a betterdeal—or for no reason" (Famswortb 1987, p. 221).

The limitations of contract law suggest the importance ofnonlegaJ approaches for goveming exchange negotiations.Although not equivocal, these approaches supplement lawsthat have developed to govem this stage of the exchangeprocess. For example, while determining the appropriatevalue of a bond to be posted during negotiations poses somedifficulties, such a self-interest stake may deter opportunis-tic tendencies and provide assurances to each party. Infor-mation regarding past dealings (i.e., reputations and trust-worthiness) may also assist parties in evaluating opportunis-tic propensities. In contrast, because of their undevelopednature, social norms provide a somewhat lesser safeguard-ing role. Three considered key by Macneil (1980) in hiselaboration of common contract norms include "relianceand expectation interests" (i.e., those identified as "linking"norms), "restraint of power," and "reciprocity" (i.e., mutual-

ity). Parties can also emphasize individual ethics (e.g., trust,commitment).

While providing a limited govemance role in the negotia-tion stage, some aspects of contract law are notable in theiraddress of opportunism. For example, the common law prin-ciples of promissory estoppel and unjust enrichment addressopportunism during this stage. Similarly, the UCC's "goodfaith" requirement has been construed to extend to negotia-tions. In tort law, actions for interference with prospectiveadvantage and promissory fraud safeguard parties in negoti-ations to some degree.

Viewed together, both legal and nonlegal approaches togovemance play a role in regulating negotiations and pro-viding coordinated govemance. In the early stages, nonlegalapproaches appear pritnary. As the process of exchangeevolves toward the transaction stage, these approaches sup-plement one another in providing effective regulation ofopportunism.

IVansaction StageBecause much of contract law views exchange in a transac-tional sense, many of its safeguards have evolved to curb op-portunism in the transaction phase. These principles focuson the nature of consent required for a contract to exist, ca-pacity of the parties, timing of the agreement, and methodsof interpretation and formalities in the constmction of a con-tract. Precise legal mles dictate the preconditions and pointin time for a lawful exchange to occur. These rules distin-guish negotiations—including statements of opinions andintentions, inquiries, and invitations to make offers—as out-side the transaction and much of contract law. Similarly, for-mal rules of acceptance distinguish assent, agreement, and

Joumal of Public Policy & Marketing 255

formation under the legal obligations of a contract from per-fonnance and continuing exchange development (i.e., ad-ministration; Calamari and Perillo 1987). Together, thesemles provide safeguards for protecting against opportunismafter parties have negotiated to agreement and before obli-gations have been fulfilled or continuing relationscontemplated.

In that the basis of an exchange transaction rests primari-ly on formal principles set forth in the law, nonlegal ap-proaches provide limited or secondary govemance of thisstage. In a strict sense, whether a legally valid contract ex-ists, the time of an agreement and the precise meaning of itslanguage are derivatives of the law. Indeed, fulfilling theselegal requirements fumishes an exchange legal status. Al-though nonlegal approaches provide support, the law dic-tates the requisite qualifications and guides exchangeconduct.

The nature of support provided through nonlegal ap-proaches varies. For example, consideration of reputationand trustworthiness facilitates assent as parties move fromnegotiations to the transaction stage. Similariy, the socialnorm identified by Macneil—"effectuation of consent"—-supports this evolution (cf. Macneil 1980). For stmcturingthe parties' agreement, bonds posted by each and the socialnorm of "restraint of power" as well as ethical values yieldbilateral incentives and outcomes. Social norms of "imple-mentation of planning" and "presentiation" (i.e., bringingthe future into the present; Macneil 1980) support draftingand finalization of an exchange. The process then evolvestoward the administration stage. As this process transpires,nonlegal approaches again become primary in their gover-nance role.

Administration StageAfter trade partners have established a relationship and per-formance is underway with the prospect of long-term com-mitment, contract law. as in negotiation, provides less regu-lation of opportunism. Given its transactional orientation,this stage is generally viewed under the law as comprising"new" negotiations rather than the continuing developmentof an existing relationship (Muris 1981). For the most part,the law ignores whether and to what extent parties possess ahistory of interaction. Although some exceptions exist (e.g.,relational adaptations in contract law), parties are particular-ly vulnerable to opportunism with few legal safeguards dur-ing the performance of nonsimultaneous contractual obliga-tions. During these latter stages, nonlegal approaches be-come of particular importance.

For the nonlegal regulation of the administration stage,bonds existing in the relationship continue to provide safe-guarding incentives. Adjustments may be required, however,as parties perfomi their obligations at differing times withbenefits accruing to parties at varying intervals. Reputation-al considerations based on extemal exchanges become moreinternally based and thus more certain. With a history, eval-uations of past conduct and trustworthiness can be obtainedfrom the exchange relationship itself. When consensus ex-ists, social norms focusing on implementation of the agreed-upon exchange and future exchanges emerge and guide con-duct in the relationship. These include the norms of "soli-

darity," "role integrity," "harmonization of conflict,""preservation of the relation." "propriety of means" andother supracontract norms (Macneil 1980). Paralleling thesenorms, ethical values (e.g., equity, responsibility) continueto play a safeguarding role.

DiscussionModern exchange relationships are likely to call on bothlegal and nonlegal govemance approaches. To the extent thateach provides effective safeguards against opportunism,each will be relied on. The govemance model proposed heresuggests that contract law provides the basis and meansthrough which participants can engage in a legally enforce-able transaction. Nonlegal or relational approacbes providesafeguards particularly applicable to negotiation and the ad-ministration of an exchange. Together, these approacheswork dynamically to govem the exchange process.

For managers, buyers, sellers, organizations, consumers,and the like, the ideas developed here provide a broadenedunderstanding of modem exchange govemance. Applicationof these notions can facilitate better development and man-agement of exchange relationships. At minimum, under-standing the altemative tnodes of govemance—both legaland nonlegal—should aid in managing the process of ex-change. Recognition of their role and conceptual limitationscan provide advantages to parties as they develop gover-nance "systems" in their exchanges.

Of specific importance is recognition of the limited avail-ability of legal mechanisms for regulating conduct duringnegotiations and subsequent administration of an exchange.The proposed model suggests that participants are more vul-nerable to opportunism during negotiations and the admin-istration of an exchange given the limitations of the law. Toguard against opportunism, participants should incorporatenonlegal govemance approaches during these stages.

Policy ImplicationsFor legal theory and development, consideration of ex-change governance from a process perspective highlightsthe conceptual borders of the law. The need to recast ormodify legal contract theory to address adequately the na-ture of ongoing exchange is apparent from the analysis pro-vided. To date, the policy response has been to make adjust-ments to the applied law of contract through infusion of so-cial govemance elements. Statutory changes, doctrinal evo-lution in the courts, and scholars advancing new legal ruleshave contributed much in this respect. Thus, evolution of thelaw is underway. A key dilemma as this evolution unfolds,however, relates to the contrasting nature and enforcementmode of legal and nonlegal govemance approaches. On thisissue Scott (1990, p. 615) notes;

^Exchange parties] behave under two sets of rules: a strict .set ofrules or legal enforcetnent and a more flexible set of rules for so-cial enforcement. It may be that the great lesson for the courts isthat any effort to judicialize these social rules will destroy thevery informality that makes them so effective in the firstinstance.

Thus, any attempt at modifying the law to incorporate non-lega! devices must be sensitive to this trade-off.

256 Exchange Govemance

One approach is for the law to identify and recognize as astandard, nonlegal devices but preclude from defming themin specific terms. This approach has been employed effec-tively in the UCC. which identifies, for example, good faithas applying to certain exchanges but specifies the defmitionof this standard as extending from "standards common tothe particular trade or industry." A second approach involvesthe overhaul of contract law to reflect better the process na-ture of modem exchange. Given the discrete assumptions ofextant legal contract doctrine, this approach may be neces-sary to tmly modemize the law. To some extent, this ap-proach has been implemented through the Restatement ofContracts, 2nd(\9S\).

Further ResearchWhatever approach is taken, it is clear that resolving how toaddress opportunism in modem exchange and safeguard theexchange process requires greater understanding of howparties actually negotiate, form, and administer their ex-change relationships. Marketing is only now beginning torecognize exchange as the discipline's core concept (e.g.,Houston 1994). Recent study and examination of differenttypes of exchange, antecedent conditions, and outcomesrepresent initial steps. Only in this way can the proper legaltheory and laws be developed and the role of nonlegal gov-emance approaches be determined.

An important objective involves understanding further thenature of govemance systems in exchange. The focus pro-vided here emphasizes the complementary nature of legaland nonlegal approaches. Researchers in the future maywish to explore other ways in which these approaches relate.For example, in some instances, these approaches can workin opposition to one another. Recent work by Gundlach andAchrol (1993) investigating legal contracting and the pres-ence of relational social norms in exchange suggests thatthese approaches may be inversely related.

In other instances, both legal and nonlegal approaches cancombine and work together conjunctively. As illustration,consider a seller offering a limited time contractual guaran-tee while engaging in advertising in an effort to develop ahigh-quality reputation for its products. Together, the ex-pense of advertising (i.e., a type of nonlegal bond) alongwitb the legal contract guarantee (i.e., legal) is likely to pro-vide sufficient motivation to avoid opportunistic degradationof the product through quality obsolescence strategies, andthe like. As to tbis potential, recent work by Heide (1994) in-vestigating the symmetry of bonds (i.e., dependence in theirterms) and the emergence of the social nomi of flexibility il-lustrates the interrelation of these two approaches.

Finally, some legal mechanisms may be enforced throughnonlegal sanctions and vice versa (Klein and Leffler 1981).Providing a warranty represents use of the law to ensureproduct quality and guard against opportunism. However,resort to the law is rarely employed in enforcing war-ranties—rather, a manufacturer's concem for its reputationis often sufficient to maintain quality standards. Study ofthese dynamics is likely to yield insight as to exchangegovemance.

A potential organizing mechanism for inquiry into the na-ture of govemance and govemance systems and one that en-

ables integration of differing theoretical frameworks under-lying govemance is the political economy model (Achrol,Reve, and Stem 1983; Stem and Reve 1980). This frame-work structures analysis of exchange relations through focuson extemal and inlemal economic and sociopolitical struc-ture and processes. In this way, the model envisions andcomparatively organizes the differing governanceapproaches.

Study of the process nature of exchange also provides im-plications for research in general. For example, dependingon the particular stage of the process, theoretical develop-ment of exchange phenomenon may require contingency-based conceptions. As illustration, consider the differing cri-teria that tnight be required for assessing the performance ofa long-term exchange association, for example, a strategicalliance, from initial negotiations to its inception (i.e., trans-action) and through its ongoing administration. Evaluativecontent and standards are likely to vary at each stage, sug-gesting a contingency approach. Similarly, measurement is-sues extending from the sampling of exchanges at differingstages may pose implications for the design of research.Sampling relationships at different stages could lead to con-founded results, particularly when investigating govemanceissues such as those explored here. Investigators, therefore,must be conscious of the implications extending from con-ceiving of exchange as a process.

ConclusionThe study of how parties organize and regulate their ex-change relationships to enhance efficiency and deter oppor-tunism represents an important research direction for the fu-ture (Webster 1992). Recent emphasis of exchange relation-ships in marketing and scholarship in law that questions therelevance of legal approaches for governing these associa-tions underscores this prospect. In the absence of legalmechanisms of governance, nonlegal enforcement ap-proaches become increasingly important. Exchange gover-nance, in all likelihood, represents the dynamic applicationof both legal and nonlegal govemance. This research repre-sents an initial step toward understanding the role and inter-play of these approaches through examination of the ex-change process.

ReferencesAchrol, Ravi Singh, Torger Reve. and Louis W. Stem (1983), "The

Environment of Marketing Channel Dyads: A Framework orComparative Analysis," Joumal of Marketing, 47 (Fall), 55-67.

Anderson. Erin {1985), "The Salesperson as Outside Agent or Em-ployee: A Transaction Cost Analysis," Marketing Science, 4(Summer). 234-54.

(1988). "Transaction Costs as Detemiinants of Oppor-tunism in Integrated and Independent Sales Force." Joumal ofEconomic Behavior and Organization, 9 (3), 247-64.

and Anne Coughlan (1987), "Intemational Market Entryand Expansion Via Independent or Integrated Channels of Dis-tribution," Joumal of Marketing, 51 (January), 71-82.

and Richard L. Ohver (1987). "Perspectives on Behav-ior-Based vs. Outcome-Based Salesforce Control Systems,"Joumal of Marketing, 51 (October), 76-88.

Joumal of Public Policy & Marketing 257

and Barton Weitz (1983), "Make or Buy Decisions: Ver-tical Integration and Marketing Productivity," Sloan Manage-ment Review, 27 (Spring). 3-19.

and (1992), "The Use of Pledges to Build and

and (1983). "The Mitigation Principle: To-

Sustain Commitment In Distribution Channels," Journal of Mar-keting Research, 29 (February), 18-24.

Amdt. Johan (1979), "Toward a Concept of Domesticated Mar-kets." Joumal of Marketing, 43 (Fall), 69-75.

Arrow. Kenneth J. (1985). "The Economics of Agency," in Princi-pals and Agents: The Structure of Business, J. Pratt and R. Zeck-hauser, eds. Boston: Harvard Business School Press. 37-51.

Banfield, E.C. (1958), The Moral Basis of a Backward Society.New York: The Free Press.

Beate. Hugh and Tony Dugdale (1975), "Contracts Between Busi-nessmen: Planning and the Use of Contractual Remedies,"British Journal of Law and Society. 2, 45-60.

Blau. Peter (1964), Exchange and Power in Social Life. New York:John Wiley & Sons. Inc.

Boyle. Brett, F. Robert Dwyer, Robert A. Robicheaux, and JamesT. Simpson (1992). "On Influence Strategies in Marketing Chan-nels." Joumal of Marketing, 29 (Novetnber), 462-73.

Bromberg. Allan R. and Lany E. Ribstein (1988). Bwmherg andRibstein on Partnership. Boston: Little, Brown Publishing.

Calamari, John D. and Joseph M. Perillo (1987), Contracts. St.Paul, MN: West Publishing.

Chamey, David (1990). "Nonlegal Sanctions in Cotnmercial Rela-tionships," Harvard Law Review, 104 (2), 373-467.

Coase, Ronald (1988), The Firm, the Market and the Law. Chica-go: University of Chicago Press.

Commons. J. (1950). The Economics of Collective Action. NewYork: MacMillan.

Dugdale. A. M. andN. V. Lowe (1976), "Contracts to Contract andContracts to Negotiate," Joumal of Business Law, 28-37.

Dwyer, R. Robert, Paul H. Schurr, and Sejo Oh (1987), "Develop-ing Buyer-Seller Relationships," Joumal of Marketing, 51(April). 11-27.

Famsworth, E. Allen (1987), "Precontractual Liability and Prelim-inary Agreements: Fair Dealing and Failed Negotiations,"Colutnbia Law Review, 87, 217-94.

feldman v. Allegheny Intemational Inc. (1988), 850 F. 2d 1217.

Ferrell. O.C., Larry G. Gresham, and John Fraedrich (1985). "AContingency Framework for Understanding Ethical DecisionMaking in Marketing," Joumal of Marketing, 49 (Summer),87-96.

. , and (1989), "A Synthesis of Eth-ical Decision M[>dels for Marketing." Joumal of Macromarket-ing, 9 (Fall), 55-64.

Ford, David (1980), "The Development of Buyer-Seller Relation-ships in Industrial Markets." European Joumal of Marketing, 19(5/6). 339-53.

Frazier, Gary L.. Robert E. Spekman. and Charles R. O'Neal(1988). "Just-In-Time Exchange Relationships in IndustrialMarkets." Joumal of Marketing, 52 (October), 52-67.

Gilmore, Grant (1974). The Death of Contract. Columbus, OH:Ohio State University Press.

Goetz. Charles J. and Robert E. Scott (1981), "Principles of Rela-tional Contracts," \nrginia Law Review, 67 (6), 1089-150.

ward a General Theory of Contractual Obligation." Virginia LawReview, 69 (6), 961-1024.

Goldberg, Victor (1979), "The Law and Economics of Vertical Re-strictions: A Relational Perspective," Texas Law Review, 58,19-129.

Graham, Daniel A. and Ellen R. Peirce (1989). "Contract Modifi-cation: An Economic Analysis of the Hold-up Game," Law andContemporary Problems, 52 (1), 9-32.

Gundlach. Gregory T. and Ravi S. Achrol (1993), "Govemance inExchange: Contract Law and Us Altematives," Joumal of PublicPolicy & Marketing, 12 (November), 141-55.

and Patrick E. Murphy (1993), "Ethical and Legal Foun-dations of Relational Marketing Exchanges." Joumal of Market-ing, 57 (October), 35^6 .

Hadfield. Gillion K. (1990). "Problematic Relations: Franchisingand the Law of Incomplete Contracts," Stanford Law Review. 42,927-92.

Heide. Jan B. (1994). "Interorganizational Govemance in Market-ing Channels." Joumal of Marketing, 58 (January). 71-85.

and George John (1988). "The Role of Dependence Bal-ancing in Safeguarding Transaction- Specific Assets in Conven-tional Channels," Joumal of Marketing, 52 (January), 20-35.

and (1990), "Alliances in Industrial Purchas-ing: The Determinants of Joint Action in Buyer-Supplier Rela-tionships," Joumal of Marketing Research, 27 (February),24-36.

and (1992), "Do Norms Really Matter?"Joumal of Marketing, 56 (2), 32-44.

Houston, Franklin S. (1994), Marketing Exchange Relationships,Transactions, and Their Media. Westport. CT: Quorem Books.

-— and Jule B. Gassenheimer (1987). "Marketing and Ex-change," Joumal of Marketing. 41 (October). 3-18.

Hunt. Shelby D. and S. Vitell (1986), "A General Theory of Mar-keting Ethics," Joumal of Macromarketing, 6 (Spring). 5-16.

Jackson, Barbara B. (1985), Winning and Keeping Industrial Cus-tomers: The Dynamics of Customer Relationships. Lexington,MA: D.C. Heath and Company.

John, George (1984), "An Empirical Investigation of Some An-tecedents of Opportunism in a Marketing Channel," Joumal ofMarketing Research, 21 (August). 278-89.

and Barton A. Weitz (1989), "Salesforce Cotnpensation:An Empirical Investigation of Factors Related to Use of Salaryvs. Incentive Compensation," Joumal of Marketing Research, 26(February), 1-14.

Kaufmann. Patrick J. and Louis W. Stem (1988). "Relational Ex-change Norms, Perceptions of Unfaimess, and Retained Hostil-ity in Commercial Litigation," Joumal of Conflict Resolution, 32(3), 534-52.

Keeton. W.. D. Dobbs. R. Keeton, and D. Own (1984), ProsserandKeeton on Torts. St. Paul. MN: West Publishing.

Klein. Benjamin (1980), "Transaction Cost Determinants of 'Un-fair' Contractual Arrangements," American Economic Review,70, 356-62.

and Keith B. Uffler (1981). "The Role of Market Con-tracts in Assuring Contractual Performance," Joumal of PoliticalEconomy, 89(4), 615-41.

Klein. Saul, Gary L. Frazier, and Victor J. Roth (1990), "A Trans-action Cost Analysis Model of Channel Integration of Intema-

258 Exchange Govemance

tionai Markets," Joumal of Marketing Research, 27 (May),196-208.

Lewis. Richard (1982), "Contracts Between Businessmen: Reformof the Law of Firm Offers and an Empirical Study of TenderingPractices in the Building Industry," Joumal of Law and Society.9(2), 153-75.

Linzer, Peter (1981), "On the Amorality of Contract Remedies—EfBciency, Equity, and the Second Restatement," Columbia LawReview, i\, 111-39.

Livermore, John (1986). "Exemption Clauses in Inter-BusinessContracts." Joumal of Business Law, March. 90-102.

Macaulay. Stewart (1963), "Non-Contractual Relations in Busi-ness: A Preliminary Study," American Sociological Review, 28,55-69.

Macneil, Ian R. (1978), "Contracts; Adjustment of Long-TermEconomic Relations Under Classical, Neoclassical, and Rela-tional Contract Law," Northwestern Law Review, 72. 854-905.

(1980), The New Social Contract: An Inquiry into Mod-em Contractual Relations. New Haven. CT: Yale UniversityPress.

(1981), "Economic Analysis of Contractual Relations:Its Shortfalls and the Need for a Rich Classificatory Apparatus,"Northwestem University Law Review, 75 (6), 1018-63.

(1982), Comments to the Workshop on Transaction CostAnalysis in Marketing (August), Evanston, IL.

Meinhard v. Salmon (1928), 249 N.Y. 458.

Metzger. Michael B. and Michael J. Phillips (1983), "The Emer-gence of Promissory Estoppel as an Independent Theory of Re-covery," Rutgers Law Review. 35, 472-557.

Muris, Timothy J. (1981), "Opportunistic Behavior and the Law ofConduct," Minnesota Law Review, 65, 521-90.

Narasimhan, Subha (1987), "Modification: The Self-Help SpecificPerformance Remedy," Yale Law Journal. 97, 61-95.

(1989). "Relationship or Boundary? Handling Succes-sive Contract," California Law Review, 77. 1077-122.

Noordewier, Thomas G., George John, and John R. Nevin (1990),"Performance Outcomes of Purchasing Arrangements in Indus-trial Buyer-Vendor Relationships," Joumal of Marketing, 54 (4),80-93.

Palay, Thomas M. (1985), "Avoiding Regulatory Constraints: Con-tracting Safeguards and the Role of Infonnal Agreements," Jour-nal of Law, Economics and Organization. 1 (1). 155-75.

Pruitt, Dean G. (1981), Negotiation Behavior. New York: Academ-ic Press, Inc.

Restatement of Contracts, 2nd (1981), American Law Institute.

Robin, D.P. and E.E. Reidenbach (1987), "Social Responsibility,Ethics, and Marketing Strategy: Closing the Gap Between Con-cept and Application," Joumal of Marketing, 51 (January),44-58.

Robison, Thornton E. (1983), "Enforcing Extorted Contract Mod-ifications," Iowa Law Review. 68, 699-751.

Schelling, Thomas C. (1956), "An Essay on Bargaining," AmericanEconomic Review. 46 (June). 281-306.

Scotl. Robert (1990). "A Relational Theory of Default Rules forCommercial Contracts," Joumal of Legal Studies, 19, 597-616.

Shell, G. Richard (1991), "Opportunism and Trust in the Negotia-tion of Commercial Contracts: Toward a New Cause of Action,"Vanderbilt Law Review, 44 (2). 221-82.

Stem. Louis W. and Torger Reve (1980). Distribution Channels asPolitical Economics: A Framework for Comparative Analysis,"Joumal of Marketing. 44 (Summer), 52-64.

Thomas, Gloria P. and Gary F. Soldow (1988). "A Rules-Based Ap-proach to Competitive Interaction," Joumal of Marketing, 52(April), 63-74.

Uniform Commercial Code (1978), American Law Institute andthe National Conference of Comtnissioners on Uniform StateLaws.

Uniform Partnership Act (1969), Uniform Laws Annotated. St.Paul. MN: Wes! Publishing.

Varadarajan, Rajan P. and Daniel Rajaratnam (1986). "SymbioticMarketing Revisited." Joumal of Marketing, 56 (October).1-17.

Vestal, Allan W. (1991). " 'Ask Me No Questions and Til Tell YouNo Lies": Statutory and Common-Law Disclosure RequirementsWithin High-Tech Joint Ventures." Tulane Liiw Review. 65 (4),705-74.

Vincent-Jones. Peter (1989), "Contract and Business Transactions:A Socio-Iegal Analysis," Joumal of Law and Society. 16 (2),166-86.

Webster, Frederick E. (1992). "The Changing Rule of Marketing inthe Corporation," Journal of Marketing. 56 (4), 1-17.

Weizsacker, Carl FF. Von (1981), Barriers to Entry. New York:Farrar Straus Giroux.

Williams. Oliver F and Patrick E. Murphy (1990), "The EthicsVirtue: A Moral Theory for Marketing," Journal of Mavmmar-keting. 10 (Spring). 19-29.

Williamson. Oliver E. (1975), Markets and Hierarchies. Analysisand Antitrust Implications. New York: Free Press.

(1979), "Transaction Cost Economics: The Govemanceof Contractual Relations," Joumal of Law and Economics. 22,233-61.

(1983). "Credible Commitments: Using Hostages toSupport Exchange." The American Economic Review. 73 (4),519-40.

(1985). The Economic Institutions of Capitalism. NewYork: The Free Press.

and William G. Ouchi (1981), "The Markets and Hier-archies Program of Research: Origins, Implications, Prospects,"in Perspectives on Organizational Design and Behavior, A.H.Van de Ven and W. F. Joyce, eds. New York: John Wiley & Sons.347-70.

, Michael L. Wachter. and Jeffrey E. Harris (1975), "Un-derstanding the Employment Relation; The Analysis of Idiosyn-cratic Exchange," Belt Journal of Economics. 6. 250-78.

Wisconsin Knife Works v. National Metal Crafters (1986), 781 F.2d1280. . .