A Vendor's Decision: To Join or Not to Join Group Purchasing Organization

Posted: 9 Jan 2015

See all articles by Yu-Chen Ben Yang

Yu-Chen Ben Yang

National Sun Yat-sen University - College of Management

Hsing Kenneth Cheng

University of Florida - Warrington College of Business

Chao Ding

The University of Hong Kong - School of Business

Date Written: January 7, 2015

Abstract

Group purchase organizations (GPOs) is an entity that utilizes collective buying power to obtain significant discounts from vendors, which could be suppliers, distributors and manufacturers. This paper seeks to examine two critical questions faced by vendors: (1) business strategy: should the vendor partner with GPO in offering a quantity discount; (2) pricing policy: what is the vendor’s optimal price to achieve maximum profit under such partnership. By implementing a linear quantity discount scheme, our findings include (1) the size of GPO members plays a vital role in the vendor’s business strategy; (2) the vendor should price the product close to the reservation price of the GPO members should she choose to partner with GPO; and (3) we also study GPO’s optimal administrative fee and we show that GPO’s profit is proportionate to the square of the fee.

Keywords: Group Purchasing Organizations, quantity discount, procurement, optimal pricing, market segmentation

Suggested Citation

Yang, Yu-Chen Benjamin and Cheng, Hsing Kenneth and Ding, Chao, A Vendor's Decision: To Join or Not to Join Group Purchasing Organization (January 7, 2015). Available at SSRN: https://ssrn.com/abstract=2546461

Yu-Chen Benjamin Yang

National Sun Yat-sen University - College of Management ( email )

No. 70, Lienhai Rd.
Kaohsiung, 80424
Taiwan

Hsing Kenneth Cheng (Contact Author)

University of Florida - Warrington College of Business ( email )

P.O. Box 117169
Gainesville, FL 32611-7169
United States
352-392-7068 (Phone)
352-392-5438 (Fax)

Chao Ding

The University of Hong Kong - School of Business ( email )

Pok Fu Lam
Hong Kong

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