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Does Pooling Purchases Lead to Higher Profits?

Author

Listed:
  • Bin Hu

    (Kenan-Flagler Business School, University of North Carolina at Chapel Hill, Chapel Hill, North Carolina 27599)

  • Izak Duenyas

    (Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109)

  • Damian R. Beil

    (Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109)

Abstract

Consider two buyers facing uncertain demands who need to purchase a common critical component from a powerful sole-source supplier. If the two buyers pool their demands and purchase from the supplier as a single entity, will they necessarily earn higher profits than purchasing separately? We show that when a powerful supplier extracts profits from the buyers through optimal contract design, the demand variability reduction achieved by pooling can harm the buyers because it makes extracting profits easier for the supplier. We characterize cases when pooling is disadvantageous and also provide insights into when it is still advantageous. Our result is in contrast to the case where the price of the component is exogenous (typically assumed in most of the pooling literature), in which case pooling demands is always beneficial for the buyers. This paper was accepted by Yossi Aviv, operations management.

Suggested Citation

  • Bin Hu & Izak Duenyas & Damian R. Beil, 2013. "Does Pooling Purchases Lead to Higher Profits?," Management Science, INFORMS, vol. 59(7), pages 1576-1593, July.
  • Handle: RePEc:inm:ormnsc:v:59:y:2013:i:7:p:1576-1593
    DOI: 10.1287/mnsc.1120.1651
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    References listed on IDEAS

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    Citations

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    Cited by:

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    3. Schouten, Jop, 2022. "Cooperation, allocation and strategy in interactive decision-making," Other publications TiSEM d5d41448-8033-4f6b-8ec0-c, Tilburg University, School of Economics and Management.
    4. Eduard Stoppel & Stefan Roth, 2017. "The conceptualization of pricing schemes: From product-centric to customer-centric value approaches," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 16(1), pages 76-90, February.
    5. Anil Arya & Hans Frimor & Brian Mittendorf, 2015. "Decentralized Procurement in Light of Strategic Inventories," Management Science, INFORMS, vol. 61(3), pages 578-585, March.
    6. Schouten, Jop & Groote Schaarsberg, Mirjam & Borm, Peter, 2020. "Cost Sharing Methods for Capacity Restricted Cooperative Purchasing Situations," Other publications TiSEM aa7f747d-c97b-4655-b6cb-9, Tilburg University, School of Economics and Management.
    7. Zhou, Jianheng & Luo, Yao, 2023. "Bayes information updating and multiperiod supply chain screening," International Journal of Production Economics, Elsevier, vol. 256(C).
    8. Soo-Haeng Cho & Xin Wang, 2017. "Newsvendor Mergers," Management Science, INFORMS, vol. 63(2), pages 298-316, February.
    9. Stadtherr, Frank & Wouters, Marc, 2021. "Extending target costing to include targets for R&D costs and production investments for a modular product portfolio—A case study," International Journal of Production Economics, Elsevier, vol. 231(C).

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