Block sourcing

József Sákovics, Lluis Bru and Daniel Cardona

Edinburgh School of Economics Discussion Paper Series from Edinburgh School of Economics, University of Edinburgh

Abstract: We study how a buyer should structure his demand in the presence of diseconomies of scale in production. Compared to an efficient market with n (identical) suppliers, he benefits from auctioning large blocks of contracts and sourcing only the remainder via the market. Optimally, he sets n - 2 or n - 1 lots, depending on his bargaining power vs. a single supplier. The distortion leads to overproduction and to the misallocation of production. When he has commitment power and can strategically set the quantity, block sourcing is still beneficial, but - unless his bargaining power is very high - it leads to underproduction.

Keywords: Procurement; Price competition; Split awards; Strategic sourcing (search for similar items in EconPapers)
JEL-codes: C72 D44 L14 (search for similar items in EconPapers)
Pages: 37
Date: 2018-06
New Economics Papers: this item is included in nep-com
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Citations: View citations in EconPapers (1)

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