The perils of group purchasing in a competing supply chain

Document Type : Article

Authors

1 Department of Industrial Engineering, Iran University of Science and Technology, Tehran, Iran

2 Department of Decision Sciences and Managerial Economics, the Chinese University of Hong Kong, Hong Kong

Abstract

Group purchasing organizations (GPOs) are well-known intermediary firms that play an important role in some supply chains. An important question that arises regarding the GPOs, is whether a GPO that benefits from group buying discounts, always benefit the OEMs in the presence of market competition. In other words, does a GPO always lead to a win-win outcome for OEMs and the GPO? To answer this question, a bargaining framework has been used to investigate competing OEMs' procurement's strategies. The entrance of a GPO in a two tier supply chain that consists of two competing OEMs with a common supplier that has a quantity discount menu is analyzed. The result shows that low purchasing cost GPO may harm OEMs in a cost-benefit perspective. This unintuitive result can be explained by different impacts that a GPO has in purchasing process. Although, it can enlarge the size of trade surplus; but, it has an important influence on the size of the slice of the pie (profit sharing). Moreover, an OEM's procurement strategy in equilibrium not just only depends on his bargaining power; but also depends on his competitor OEM. Interestingly, a strong OEM may not prefer procuring through GPO, as well as a weak OEM does.

Keywords

Main Subjects

References

References:
1. Wu, D. "Supply chain intermediation (A Bargaining theoric framework)", In Handbook of Quantitative Supply Chain Analysis, by David Simchi-Levi, David Wu, and Max Shen, pp. 67-115, Kluwer Academic, Dordrecht, Netherlands (2004).
2. Spulber, D.F. "Market microstructure and intermediation", Journal of Economic Perspectives, 10(3), pp. 135-152 (1996).
3. Gans, J.S. "Vertical contracting when competition for orders precedes procurement", The Journal of Industrial Economics (WILEY), 55(2), pp. 325-346 (2007).
4. Ingene, C.A., and Parry, M.E. "Channel coordination when retailers compete", Marketing Science (INFORMS), 14(4), pp. 360-377 (1995).
5. Tsay, A.A. and Agrawal, N. "Channel dynamics under price and service competition", Manufacturing & Service Operations Management (INFORMS), 2(4), pp. 372-391 (2000).
6. Iyer, G., and Villas-Boas, M.J. "A Bargaining theory of distribution channels", Journal of Marketing Research, 40(1), pp. 80-100 (2003).
7. Dukes, A.J., Gal-Or, E., and Srinivasan, K. "Channel bargaining with retailer asymmetry", Journal of Marketing Research, American Marketing Association, 43(1), pp. 84-97 (2006).
8. Feng, Q. and Lu, L.X. "Supply chain contracting under competition: Bilateral bargaining vs. stackelberg", Production and Operations Management, Production and Operations Management Society, 22(3), pp. 661- 675 (2013).
9. Feng, Q. and Lu, L.X. "The role of contract negotiation and industry structure in production outsourcing", Production and Operations Management (POMS), 22(5), pp. 1299-1319 (2013).
10. Feng, Q. and Lu, L.X. "The strategic perils of low cost outsourcing", Management Science (INFORMS), 58(6), pp. 1196-1210 (2012).
11. Guo, L. and Iyer, G. "Multilateral bargaining and downstream competition", Marketing Science (INFORMS), 32(3), pp. 411-430 (2013).
12. Jeuland, A. and Shugan, S. "Managing channel profits", Marketing Science (INFORMS), 2(3), pp. 239-272 (1983).
13. Lovejoy, W.S. "Bargaining chains", Management Science (INFORMS), 56(12), pp. 2282-2301 (2010).
14. Chen, R. and Roma, P. "Group buying of competing retailers", Production and Operations Management (POMS), 20(2), pp. 181-197 (2011).
15. Marvel, H.P. and Yang, H. "Group purchasing, nonlinear tari s, and oligopoly", International Journal of Industrial Organization (Elsevier), 26, pp. 1090-1105 (2008).
16. Hu, Q., and Schwarz, L.B. "Controversial role of GPOs in healthcare-product supply chains", Production and Operations Management (POMS), 20(1), pp. 1-15 (2011).
17. Dana, J.D. "Buyer groups as strategic commitments", Games and Economic Behavior, Elsevier, 74, pp. 470- 485 (2012).
18. Hu, Q., Schwarz, L.B., and Uhan, N.A. "The impact of group purchasing organizations on healthcare-product supply chains", Manufacturing & Service Operations Management (INFORMS), 14(1), pp. 7-23 (2012).
19. Stahl, D.O. "Bertrand competition for inputs andWalrasian outcome", American Economic Association, The American Economic Review, 78(1), pp. 189-201 (1988).
20. Gans, J.S. "Vertical contracting when competition for orders precedes procurement", The Journal of Industrial Economics (WILEY), 55(2), pp. 325-346 (2007).
21. Schotanus, F. "Horizontal cooperative purchasing", Ph.D. Dissertation, University of Twente, Enschede (2007).
Scientia Iranica
Volume 26, Issue 5
Transactions on Industrial Engineering (E)
September and October 2019
Pages 2904-2918

Files

History

  • Receive Date: 08 April 2017
  • Revise Date: 02 June 2018
  • Accept Date: 24 September 2018

Share

How to cite

Statistics