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Block sourcing

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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.

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  • Jozsef Sakovics & Lluis Bru & Daniel Cardona, 2018. "Block sourcing," Edinburgh School of Economics Discussion Paper Series 287, Edinburgh School of Economics, University of Edinburgh.
    • Handle: RePEc:edn:esedps:287
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    Cited by:

    1. Lluis Bru & Daniel Cardona & Jozef Sakovics, 2019. "Beating Coase at Monopoly," Edinburgh School of Economics Discussion Paper Series 291, Edinburgh School of Economics, University of Edinburgh.

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    More about this item

    Keywords

    Procurement; Price competition; Split awards; Strategic sourcing;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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