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To join or not to join group purchasing organization: A vendor's decision

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  • Yang, Yu-Chen
  • Cheng, Hsing Kenneth
  • Ding, Chao
  • Li, Shengli

Abstract

A group purchasing organization (GPO) is an entity that utilizes collective buying power to obtain significant discounts from vendors, which can be suppliers, distributors and manufacturers. In the healthcare sector, it is reported that about 72% of hospital purchases are settled through GPO contracts. This paper seeks to examine two critical questions that vendors face: (1) business strategy: does partnering with a GPO to offer quantity discounts make strategic sense? And, if so, (2) pricing policy: what price will yield optimal, maximum profits in such a relationship? Using a linear quantity discount scheme, we find that the size of GPO members strongly influences the vendor's decision to contract (or not) with the GPO. Furthermore, we show that vendors should price their products close to the reservation prices of the GPO members if the vendors indeed wish to pursue such partnerships.

Suggested Citation

  • Yang, Yu-Chen & Cheng, Hsing Kenneth & Ding, Chao & Li, Shengli, 2017. "To join or not to join group purchasing organization: A vendor's decision," European Journal of Operational Research, Elsevier, vol. 258(2), pages 581-589.
    • Handle: RePEc:eee:ejores:v:258:y:2017:i:2:p:581-589
    DOI: 10.1016/j.ejor.2016.08.069
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    Cited by:

    1. Oktay Karabağ & Barış Tan, 2018. "Analysis of a group purchasing organization under demand and price uncertainty," Flexible Services and Manufacturing Journal, Springer, vol. 30(4), pages 844-883, December.
    2. Lang Xiong & Tingting Xiao & Fuhai Nie, 2022. "Group Buying of Competing Retailers with Strategic Inventory," Sustainability, MDPI, vol. 14(20), pages 1-18, October.
    3. Dongshuang Hou & Aymeric Lardon & Hao Sun, 2020. "On the Internal and External Stability of Coalitions and Application to Group Purchasing Organizations," Working Papers halshs-02860639, HAL.
    4. Peng, Wenli & Merckx, Gilles & Chaturvedi, Aadhaar & Chevalier, Philippe, 2022. "Purchasing together or alone? Tradeoffs for information sharing," International Journal of Production Economics, Elsevier, vol. 252(C).
    5. Dongshuang Hou & Aymeric Lardon & Hao Sun, 2020. "On the Internal and External Stability of Coalitions and Application to Group Purchasing Organizations," Working Papers 2019, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    6. Grzegorz Zimon & Vitalina Babenko & Beata Sadowska & Katarzyna Chudy-Laskowska & Blanka Gosik, 2021. "Inventory Management in SMEs Operating in Polish Group Purchasing Organizations during the COVID-19 Pandemic," Risks, MDPI, vol. 9(4), pages 1-16, April.
    7. In, Joonhwan & Bradley, Randy V. & Bichescu, Bogdan C. & Smith, Antoinette L., 2019. "Breaking the chain: GPO changes and hospital supply cost efficiency," International Journal of Production Economics, Elsevier, vol. 218(C), pages 297-307.
    8. Grzegorz Zimon & Dominik Zimon, 2020. "Quality Management Systems and Working Capital SMEs in GPO—A Case of Poland," Administrative Sciences, MDPI, vol. 10(4), pages 1-13, October.

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