Stable Group Purchasing Organizations

45 Pages Posted: 2 Jun 2008 Last revised: 23 Nov 2010

See all articles by Mahesh Nagarajan

Mahesh Nagarajan

University of British Columbia (UBC) - Sauder School of Business

Greys Sosic

University of Southern California - Marshall School of Business

Hao Zhang

University of Southern California - Marshall School of Business

Date Written: June 21, 2010

Abstract

In this paper, we study the stability of Group Purchasing Organizations (GPOs). GPOs exist in several sectors and benefit its members through quantity discounts and negotiation power when dealing with suppliers. However, despite several obvious benefits, GPOs suffer from member dissatisfaction due to unfair allocations of the accrued savings among its members. We first explore the benefits of allocation rules that are commonly reported as being used in practice. We characterize stable coalitional outcomes when these rules are used and provide conditions under which the grand coalition emerges as a tenable outcome. These conditions are somewhat restrictive. We then propose an allocation mechanism based on the marginal value of a member's contribution and find that this leads to stable GPOs in many scenarios of interest. In this analysis, we look at discount schedules that encompass a large class of practical schedules and analyze cases when purchasing requirements of the members are both exogenous as well as endogenous. We use a concept of stability that allows for players to be farsighted, i.e., players will consider the possibility that once they act (say by causing a defection), another coalition may react, and a third coalition might in turn react, and so on, nullifying their original advantage in making the initial move.

Keywords: purchasing organization, coalition stability, quantity discounts

JEL Classification: H57, C71, C62

Suggested Citation

Nagarajan, Mahesh and Sosic, Greys and Zhang, Hao, Stable Group Purchasing Organizations (June 21, 2010). Marshall School of Business Working Paper No. FBE 20-10. Available at SSRN: https://ssrn.com/abstract=1138918 or http://dx.doi.org/10.2139/ssrn.1138918

Mahesh Nagarajan

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

Greys Sosic (Contact Author)

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

Hao Zhang

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

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