The stability of cooperative sourcing coalitions ‐ game theoretical analysis and experiment

Cooperative sourcing is when multiple firms form a coalition to merge similar processes using shared-service processing in order to leverage economies of scale and skill. This paper discusses how coalition partners should allocate coalition costs and benefits to ensure a stable coalition which minimizes the incentives for current or future coalition partners to withdraw from the coalition. The paper develops a formal cost allocation and benefit model which is then used in game theoretical analyses and bargaining experiments. The results show that proportional cost allocation is key to avoiding unstable coalitions. However, if coalition partners do not disclose their cost structures to facilitate a cooperative decision in favor of proportional cost allocation, but rather negotiate shared costs based on “closed books”, proportional cost allocation is rarely achieved. In such cases, the Shapley value has high predictive power and negotiators are in danger of making poor decisions that can lead to instable coalitions. These findings help sensitize managers to the structural threats inherent to multilateral negotiations of cooperative sourcing coalitions.