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

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