A Structural Model of Organizational Buying for B2B Markets: Innovation Adoption with Share of Wallet Contracts
Cowles Foundation Discussion Paper No. 2315
59 Pages Posted: 28 Nov 2021
Date Written: November 24, 2021
The paper develops the ﬁrst structural model of organizational buying to study innovation diﬀusion in a B2B market. Our model is particularly applicable for routinized exchange relationships, whereby centralized buyers periodically evaluate and choose contracts, then downstream users order items on contracted terms. The model captures diﬀerent utility tradeoﬀs for users and buyers while accounting for how buyer and user choices interact to impact user adoption/usage and buyer contracting. Further, the paper considers the dynamics induced by share of wallet (SOW) pricing contracts, commonly used in B2B markets to reward customer loyalty with discounts for buying more than a threshold share from a supplier. We assemble novel panel data on surgeon usage, SOW contracts, contract switching, and hospital characteristics. We ﬁnd two segments of hospitals in terms of the relative power of surgeons and buyers: a buyer-centric and a surgeon-centric segment. Further, innovations diﬀuse faster in teaching hospitals and when surgeries are concentrated among a few surgeons. Finally, we answer such questions as: Should the marketer focus on push (buyer-focused) or pull (user-focused) strategies? Do SOW contracts hurt the innovations of smaller ﬁrms? Surprisingly, we ﬁnd that the contracts can help speed the diﬀusion of major innovations from smaller players.
Keywords: Organizational Buying Behavior, healthcare marketing, B2B Markets, B2B Innovation, New Product Diffusion, New Product Adoption
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