Observer Effects of Punishment in a Distribution Network

Dr. Maggie Dong
Assistant Professor in the Department of Marketing
Contact: mcdong@cityu.edu.hk
Written by Dr. Maggie Dong

Conventional wisdom in marketing highlights the use of positive mechanisms, such as monitoring and incentive devices, to safeguard exchange relationships against opportunism. The effectiveness of using disciplinary actions or punishments to govern channel relationships however remains unclear. Focusing on the examination of dyadic relationships, previous research suggests that punishment should be generally discouraged, given its detrimental effects on interfirm relationships and the relatively high cost of implementation.

This research extends beyond the established view of punishment as a dyadic event between a manufacturer and a distributor. By taking an observer’s perspective, the authors adopt a network approach to understand the impacts of punishment, not only as an enforcement strategy for a single distributor but also as an influence strategy that affects a wide network of observers. Empirically tested with a survey in China, the authors establish the positive outcomes of punishment on observers. They delineate two particular types of network processes through which punishment leads to reduced observer opportunism. First, through social learning, punishment severity deters observer opportunism. Second, punishment fairness promotes observer trust, which in turn deters opportunism. Moreover, two information-related constructs moderate the observer effects differently. The disciplined distributor’s relational embeddedness, which motivates greater information flow to observers, aggravates the problem of information asymmetry against the manufacturer, making punishment less deterrent for observers. In contrast, the manufacturer’s monitoring capability, which reduces information asymmetry, strengthens observer effects.

This study provides managerial implications for relationship governance in distribution channels. When a dysfunctional behavior occurs, manufacturers should carefully evaluate the criticality of the behavior and respond with clear and sufficiently severe enforcement, because only when the observer expects punishment outcomes to be severe enough to outweigh the potential gains does it refrain from prohibited behavior. As punishment creates perceptions of the punisher as fair or unfair, manufacturers should also work proactively to understand the expectations of distributors regarding appropriate and inappropriate behaviors. Fairness perceptions influence observers’ trust in the manufacturer, which can produce a variety of long-term relational outcomes for the productive functioning of a channel network.

While punishment can be a highly visible and effective tool to influence observers’ attitudes and behaviors, the research suggests that manufacturers should assess the situation before any action is taken. If a misbehaving distributor has deep connections with other distributors in the network, severe punishment may go against the manufacturer’s interest due to the negative reactions from interconnected distributors. Thus, a certain level of tolerance or a more lenient and private approach of punishment may be necessary. At the same time, manufacturers should actively develop their monitoring capabilities to reduce information asymmetry, align with distributor interests, and build a reputation for fairness and consistency. Strong monitoring capabilities enable managers to impose severe punishment in an attention-grabbing manner while gaining positive reactions from channel members.

For more information on the research, please visit the Journal of Marketing Research website.

Research Studies by

Danny T. Wang is Assistant Professor in the Department of Marketing at Hong Kong Baptist University. He previously taught at The University of Hong Kong, where he received his PhD. His research interests include inter-organizational relationships, marketing channel networks, and strategic issues on China market. His research has appeared in Journal of Marketing, Industrial Marketing Management, International Journal of Research in Marketing, International Business Review, Environment and Planning A, and others.

Flora F. Gu is Associate Professor of Marketing in the Department of Management and Marketing at Hong Kong Polytechnic University. She received her PhD from The University of Hong Kong. Her research interests include channel relationship management, guanxi in the business-to-business context, strategic alliances, and international marketing. Her research has appeared in Journal of Marketing, Journal of International Business Studies, Journal of International Marketing, Journal of Advertising, and others.

Maggie Chuoyan Dong is Assistant Professor in the Department of Marketing at City University of Hong Kong. She received her PhD from The University of Hong Kong. Her research interests include channel relationship management, interorganizational relationships, and IT-driven collaboration. Her research has appeared in Journal of International Marketing, International Business Review, and others.

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