Direct and Indirect Bargaining Costs and the Scope of the Firm

The organizational economics literature provides two primary arguments for vertically integrating a factor of production: incentives for investment in relationship-specific assets and improved coordination due to less bargaining activity (and other factors). Although there is now a well-established body of empirical work investigating investments in specific assets, there is almost no empirical work examining coordination costs and other costs associated with bargaining. To fully understand why bargaining is costly, it is important to investigate how bargaining activities affect the organization of activities. This requires opening the black box of how tasks are coordinated and managed within the firm. Examinations of firm operations at this level are rare in the organizational economics literature. We suspect that this omission is due in part to the difficulty of collecting data. In this article we present data comparing bargaining costs with internal and external suppliers at a single firm. Our results are derived from a unique data set comparing internal and external transactions for the