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Direct and Indirect Bargaining Costs and the Scope of the Firm

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  • Duncan Simester

    (Massachusetts Institute of Technology)

  • Marc Knez

    (Sibson Consulting)

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    Abstract

    We compare bargaining costs with internal and external suppliers using a unique data set describing internal and external transactions for the same categories of parts at a single firm. The findings confirm that direct bargaining costs are higher with external suppliers, at least in part because there is more to bargain over. We also observed higher indirect bargaining costs with external suppliers. Information that may hinder contractual negotiations is often suppressed or delayed. To enforce these restrictions, all communication with external suppliers passes through procurement personnel, greatly hindering coordination and contributing to the determination of which parts are made internally.

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    Bibliographic Info

    Article provided by University of Chicago Press in its journal Journal of Business.

    Volume (Year): 75 (2002)
    Issue (Month): 2 (April)
    Pages: 283-304

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    Handle: RePEc:ucp:jnlbus:v:75:y:2002:i:2:p:283-304

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    Web page: http://www.journals.uchicago.edu/JB/

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    Cited by:
    1. Jacques Crémer & Luis Garicano & Andrea Prat, 2007. "Language and the Theory of the Firm," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 122(1), pages 373-407, 02.
    2. Maciejovsky, Boris & Wernerfelt, Birger, 2011. "Costs of implementation: Bargaining costs versus allocative efficiency," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 77(3), pages 318-325, March.
    3. Pierre Azoulay, 2004. "Capturing Knowledge within and across Firm Boundaries: Evidence from Clinical Development," American Economic Review, American Economic Association, American Economic Association, vol. 94(5), pages 1591-1612, December.
    4. Steven Globerman & Aidan Vining, 2004. "The Outsourcing Decision: A Strategic Framework," International Trade, EconWPA 0404007, EconWPA.
    5. Wernerfelt, Birger, 2004. "Robust Incentive Contracts," Working papers, Massachusetts Institute of Technology (MIT), Sloan School of Management 4448-03, Massachusetts Institute of Technology (MIT), Sloan School of Management.
    6. Antelo, Manel & Bru, Lluis, 2010. "Outsourcing or restructuring: The dynamic choice," International Journal of Production Economics, Elsevier, Elsevier, vol. 123(1), pages 1-7, January.
    7. Alvarez, Luis H.R. & Stenbacka, Rune, 2007. "Partial outsourcing: A real options perspective," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 25(1), pages 91-102, February.
    8. Birger Wernerfelt, 2004. "Organizational Languages," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 13(3), pages 461-472, 09.
    9. Stenbacka, Rune & Tombak, Mihkel, 2012. "Make and buy: Balancing bargaining power," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 81(2), pages 391-402.
    10. Jayaram, Jayanth & Tan, Keah-Choon, 2010. "Supply chain integration with third-party logistics providers," International Journal of Production Economics, Elsevier, Elsevier, vol. 125(2), pages 262-271, June.
    11. Crémer, Jacques & Garicano, Luis & Prat, Andrea, 2004. "Codes in Organizations," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4205, C.E.P.R. Discussion Papers.
    12. Wernerfelt, Birger, 2003. "Resources, Adjustments, and Diversification: Evidence from Production Functions," Working papers, Massachusetts Institute of Technology (MIT), Sloan School of Management 4277-03, Massachusetts Institute of Technology (MIT), Sloan School of Management.

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