Does Pooling Purchases Lead to Higher Profits?

Bin Hu (), Izak Duenyas () and Damian R. Beil ()
Additional contact information
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

Management Science, 2013, vol. 59, issue 7, 1576-1593

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.

Keywords: games; inventory; production; policies; pricing; scale; diseconomies; principal--agent; demand variability (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.1120.1651 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:59:y:2013:i:7:p:1576-1593

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().