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Keywords:

  • asset specificity;
  • relationship-specific investment;
  • competition;
  • governance;
  • biform game

This paper uses biform games to examine the endogenous decision to invest in relationship-specific assets. It addresses the questions of how competition affects suppliers' decisions to produce a general-purpose product or a relationship-specific product for a buyer and under what circumstances a governance arrangement designed to share investment costs between the transacting parties increases the investment in relationship-specific assets. We offer a balanced perspective that emphasizes both the superior transaction value of relationship-specific products and their high transaction costs while considering the competition effects generated by alternative investment plans. The model and its extensions generate new insights into investment decisions regarding relationship-specific assets. Copyright © 2013 John Wiley & Sons, Ltd.