Direct and Indirect Bargaining Costs and the Scope of the Firm

We compare the magnitude of bargaining costs within and between firms. The results are derived from a unique dataset comparing internal and external transactions for the same categories of parts at a single high-technology firm. They confirm that direct bargaining costs are higher with external suppliers, at least in part because there is more to bargain over. The need to negotiate price and formal contracts typically leads to longer ex ante...