Understanding the Normative Role of Industry Standards in Channel Negotiations

Regarding pricing policies and negotiation outcomes, industry standards play a significant role in practice, but often appear arbitrary, and are most likely suboptimal from a profit-maximizing perspective. Regardless of their shortcomings, we argue in this paper that such standards play the role of social norms, which are essential to help negotiating parties reach a profitable and sustainable agreement. Absent of social norms, the uncertainty surrounding what the other players will do are such that defensive strategies are favored, to the expense of cooperative strategies. We develop and experimentally test a game in which a manufacturer and a reseller try to reach an agreement, where we manipulate the nature of their relationship and the presence and nature of industry norms. we show that both industry norms and a stable business relationship are required to reach a cooperative solution.