Market Share Contracts in B2B Procurement Settings with Heterogeneous User Preferences

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