Make and buy: Balancing bargaining power

Rune Stenbacka and Mihkel Tombak

Journal of Economic Behavior & Organization, 2012, vol. 81, issue 2, 391-402

Abstract: We 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.

Keywords: Organizational design; Multiple sourcing; Bargaining power (search for similar items in EconPapers)
JEL-codes: J52 L14 L23 M55 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:81:y:2012:i:2:p:391-402

DOI: 10.1016/j.jebo.2011.12.001

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