Market Share Contracts in B2B Procurement Settings with Heterogeneous User Preferences

Production and Operations Management (forthcoming)

56 Pages Posted: 15 Oct 2020 Last revised: 19 Oct 2021

See all articles by Ravi Mantena

Ravi Mantena

University of Rochester - Simon Business School

Rajib L. Saha

Indian School of Business (ISB), Hyderabad

Date Written: May 31, 2021

Abstract

Market share contracts, a form of loyalty discounts, where the discount is contingent on the buyer meeting or exceeding a target share of total procurement, are common in many B2B settings. We study the impact of such contracts on demand allocation, prices, and welfare in a setting where a single central B2B buyer procures multiple units of a product on behalf of a set of users with heterogeneous preferences. We find that regular (linear) pricing creates a demand distortion, which goes away with the use of market share contracts. These contracts serve as strategic tools for vendors with preferred products to shift the locus of competition and extract away rents from weaker rivals, and sometimes from buyers. The impact of such contracts on the welfare of the buyers is therefore ambiguous, but when these contracts are used, the overall surplus goes up as disutility from demand distortion is avoided. While similar in many respects, quantity threshold contracts cannot guarantee the avoidance of demand distortion when buyer demand is uncertain.

Keywords: market share contracts, B2B procurement, health care procurement, loyalty discounts

Suggested Citation

Mantena, Ravi and Saha, Rajib Lochan, Market Share Contracts in B2B Procurement Settings with Heterogeneous User Preferences (May 31, 2021). Production and Operations Management (forthcoming), Available at SSRN: https://ssrn.com/abstract=3439084 or http://dx.doi.org/10.2139/ssrn.3439084

Ravi Mantena

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

Rajib Lochan Saha (Contact Author)

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 111
India

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