Erin Anderson and David C. Schmittlein (1984)

1. Erin Anderson and David C. Schmittlein(1984) Integration of the sales force:an empirical examination Rand Journal of Economics

2. Research Question/Problem Formulation • OVERARCHING QUESTION: • When does vertical integration occur? • SPECIFIC QUESTION: • Vertical integration of sales force • Whether to use a manufacturers' representative (MARKET) or an “in-house" (employee) sales personnel (HIERARCHY) to sell a product line • EMPIRICAL NOVELTY: • Unlike prior literature the paper focuses on human assets rather than physical assets • HISTORICAL CONTEXT: • 1974: 50% of sales operations in all industries via market (manufacturers’ reps) • 1977: 10% only in 15 industries via market

3. TCE-BASED HYPOTHESES • ASSET SPECIFICITY: • Key accounts, distinctive customers, importance of relationships • The greater the total value of company-specific assets (on the company and customer sides), the greater the likelihood of vertical integration in the form of an in-house sales force. • UNCERTAINTY: • Environmental unpredictability: • The likelihood of integration is expected to increase, given non-trivial asset specificity, with increasing environmental uncertainty. • Difficulty of evaluating performance: • The likelihood of integration is expected to increase with the difficulty of evaluating performance. • FREQUENCY: • More frequent transactions call for integration • A firm has to at least break even on the fixed cost of the integration function • Density in sales is an analog of frequency • The likelihood of integration is expected to increase as density increases. • FIRM SIZE: • Economies of scale, economies of scope, market power, the ability to aggregate inputs • The greater the firm size, the greater the likelihood of vertical integration in the form of an in-house sales force.

4. DATA AND MODEL • Survey data from the electronic components industry (16 companies) • Unit of analysis: the product line of a given company in a given territory • The survey respondents are territory sales managers • Asset specificity, environmental uncertainty, difficulty in evaluating performance, territory density, company size (assets in $) are hypothesized to have a positive effect on the likelihood of using a corporate sales personnel (HIERARCHY). • Interaction terms: asset specificity/ environmental uncertainty and asset specificity/difficulty in evaluating performance • The logistic response function • The coefficients were estimated by maximizing the likelihood function (the Gauss-Newton non-linear least squares method)

5. RESULTS CASE 1: ALL EFFECTS • Difficulty of evaluating performance, company size, and asset specificity have the hypothesized (positive) effect on the probability of using an in-house corporate sales force. • Other variables are statistically insignificant. Interactions were not corroborated. • The instantaneous rate of change of the probability of using hierarchy: the largest estimated effect have the same three variable as above. • Asset specificity has “weaker” effect than the difficulty of evaluating performance. CASE 2: TCE VARS OMITTED • A logit analysis using only company size. • Statistical significance: the logarithm of the maximized likelihood function was used. The null hypothesis was rejected. TCE variables do matter. • Predictive effectiveness: Akaike's Information Criterion (Akaike, 1974). The set of transaction cost variables are expected to aid in predicting the degree of integration for firms which are not included in the estimation sample.

6. DISCUSSION • The paper is built upon the dichotomy MARKET-HIERARCHY. However, the contracts signed with manufacturers’ representatives are normally long-term with exclusivity conditions. Certain efforts are made by the reps to dive deeper into the specifics of the customer’s business. Could it be that the authors essentially studied the dichotomy HYBRID – HIERARCHY?