Paying for Teamwork: Supplier Coordination with Endogenously Selected Groups

James Fan, Anthony M. Kwasnica and Douglas J. Thomas

Production and Operations Management, 2018, vol. 27, issue 6, 1089-1101

Abstract: We experimentally investigate horizontal coordination between suppliers where group output is limited by the lowest†performing member and groups are formed endogenously. All participants first choose between one of two groups, where one group has an entry fee. Participants then simultaneously make capacity choices, and the minimum choice within each group dictates profits for group members. Allowing participants to select their group, thereby indirectly determining the group size, has strong implications for equilibrium outcomes. We find both theoretically and experimentally that the group with an entry fee always achieves higher output, while members of both groups earn equal profits in equilibrium. From a managerial perspective, costly membership fees for exclusive groups can separate high†performing and low†performing subjects when group selection is endogenous, even when the costly fee provides no other benefits. Interestingly, the group with an entry fee always has fewer subjects, suggesting that a group membership fee acts as a deterrent to poor†performing subjects.

Date: 2018
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