ABC Cost Driver Framing and Altering the Balance of Power in Customer-Supplier Negotiations

Abstract

ABSTRACTThis study examines how activity-based costing (ABC) cost driver framing affects suppliers' ability to increase their bargaining power when negotiating with powerful customers. Results of an experiment show that suppliers with the potential to contribute to increasing joint profits (high contribution potential) earn a higher share of joint profits than suppliers with low contribution potential. High contribution potential suppliers have higher bargaining power because of their ability to increase customers' dependence on negotiated agreements. However, the advantage of having high contribution potential is reduced when suppliers are provided with externally framed cost drivers (costs represented as being driven by customers' activities) instead of internally framed cost drivers (costs represented as being driven by suppliers' activities). Analyses of negotiators' behavior show that suppliers with high contribution potential and internally framed cost drivers use more integrative tactics to increase joint profits, allowing them to earn higher shares of joint profits.