Direct and indirect bargaining costs and the scope of the firm

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.