Partial Unraveling and Strategic Contract Timing

Renegotiations and last-minute contracting are prevalent in many vertical relationships. Information transmission between firms and buyers can be imperfect as well. In this paper we present a theory to explicate how early/delayed contracting over wholesale prices, and partial unraveling of private information, can sustain each other endogenously in a channel setting with bilateral monopoly. Should the wholesale price be predetermined, the downstream manufacturer would be compelled to fully disclose all private information. By contrast, the to-be-negotiated wholesale price can be potentially affected by manufacturer disclosure or concealment. This can represent a countervailing force for equilibrium revelation to be imperfect, even when disclosure is costless. Thus partial unraveling may emerge if and only if no enforceable contract has been signed (i.e., contracting is delayed). Conversely, partial unraveling can endogenously influence ex ante preferences for contract timing. Therefore, contracting may be deliberately delayed even without learning/cost considerations. Moreover, equilibrium contract timing can be socially too early to alleviate channel distortions, and bilateral bargaining can align private and social preferences for delayed contracting. This paper was accepted by Dmitri Kuksov, marketing.

Coordinating Project Outsourcing Through Bilateral Contract Negotiations

Problem definition: Project outsourcing has been a pronounced trend in many industries but is also recognized as a major cause for project delays. We study how companies can coordinate outsourced projects with uncertain completion times through bilateral contract negotiations. Academic/practical relevance: Misaligned subcontractor incentives may result in substantial losses to both project clients and subcontractors. Coordinating subcontractors’ efforts through proper contracts is imperative to the success of project outsourcing. Most previous studies on project contracting have not addressed subcontractors’ bargaining powers or the dynamic bargaining process in negotiations. We fill in this gap by studying bilateral bargaining between the client and subcontractors, which better reflects real-world negotiations. Methodology: We model project contract negotiations as a multiunit bilateral bargaining game. We derive the conditions such that bilateral negotiations can achieve system coordination and characterize the equilibrium negotiation outcomes. We then compare the conditions and equilibria under various model settings to study their impact on project contracting. Results: Our study uncovers how the coordination of project outsourcing is impacted by the contract form, bargaining power structure, precedence network topology, payment timing, external opportunities, and negotiation protocols. For single-task projects, the widely used fixed-price (cost-plus) contract can achieve system coordination only when the subcontractor (client) possesses full bargaining power. Cost-sharing and time-based incentive contracts, which perform well for single-task projects, may not be effective for projects with parallel tasks when any subcontractor’s bargaining power is sufficiently high. Projects with serial tasks can be coordinated only under certain extreme bargaining power structures. Delaying payments always exacerbates the incentive misalignment. Managerial implications: Our analysis provides insights and guidelines to companies regarding how to select proper contract forms and payment timing schemes, based on the characteristics of the projects and subcontractors, to ensure the effectiveness of project outsourcing. Our results also highlight the importance of bargaining modeling in project contracting.

Bilateral bargaining

This chapter examines how, after discussing monopoly, many principles and intermediate microeconomics books move on to the cases of monopsony (one buyer and many sellers) and bilateral monopoly (one buyer and one seller). The analysis of monopsony is straightforward after monopoly. The monopsonist, taking their supply curve as given, equates the marginal value of the factor to them with the “marginal factor cost.” Then there is a paragraph or two about bilateral monopoly. The chapter considers what noncooperative game theory has to offer to this situation. This is a case where institutions matter (according to the theory), and rather more than seems sensible, although the extreme and unintuitive sensitivity to institutional form that one sees in the theory may be attributable to the starkness of the models in terms of what players know about each other. The chapter then looks at the problem of bilateral bargaining.