Make and buy: Balancing bargaining power
AbstractWe analyze the optimal procurement of labor, which can be supplied either internally, based on wage negotiations, or acquired at terms negotiated with an external subcontractor. The novel feature of our model is that the subcontractor's bargaining power is a function of the proportion of output outsourced. We demonstrate analytically how multiple sourcing emerges as an organizational mechanism to balance cost advantages associated with outsourcing against a subcontractor's increased bargaining power. We find that the optimal proportion of outsourcing is lower with sequential negotiations than with simultaneous negotiations, if the supplier to first negotiate can foreclose subsequent negotiations.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economic Behavior & Organization.
Volume (Year): 81 (2012)
Issue (Month): 2 ()
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Web page: http://www.elsevier.com/locate/jebo
Organizational design; Multiple sourcing; Bargaining power;
Find related papers by JEL classification:
- L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
- L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
- M55 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics - - - Labor Contracting Devices
- J52 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Dispute Resolution: Strikes, Arbitration, and Mediation
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