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Market Share Contracts in B2B Procurement Settings with Heterogeneous User Preferences

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  • Ravi Mantena
  • Rajib L. Saha

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 used in many business to business (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 linear pricing creates a demand distortion, which goes away with the use of market share contracts. These contracts serve as strategic tools for vendors whose products are strongly preferred by a substantial fraction of the users in the buying organization 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 both quantity threshold contracts and two‐part tariffs can replicate the efficiency properties of market share contracts when demand is deterministic, they cannot guarantee the avoidance of demand distortion when buyer demand is uncertain.

Suggested Citation

  • Ravi Mantena & Rajib L. Saha, 2022. "Market Share Contracts in B2B Procurement Settings with Heterogeneous User Preferences," Production and Operations Management, Production and Operations Management Society, vol. 31(3), pages 1290-1308, March.
    • Handle: RePEc:bla:popmgt:v:31:y:2022:i:3:p:1290-1308
    DOI: 10.1111/poms.13611
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    References listed on IDEAS

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    Cited by:

    1. Manish Gangwar & Hemant K. Bhargava, 2023. "Pricing on‐demand services: Alternative ways of combining usage and access fees," Production and Operations Management, Production and Operations Management Society, vol. 32(1), pages 11-27, January.

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