Group Buying between Competitors: The Determinant of Power Structure

Abstract

Competing firms may engage in group buying to benefit from quantity discount from the common supplier. There are two prevailing power structures in industry practice: Nash group buying in which two competing firms possess similar powers, and Stackelberg group buying in which one firm serves as the leader to initiate group buying contract. We investigate how the competitors' power structure affects their group buying behaviors and the performances of all stakeholders (including the supplier, the two firms, and the end consumers). Our paper is the first to study the impact of power structure on group buying between competitors in B2B context. We employ a game-theoretic framework in which two firms facing Cournot competition can group their purchase if it is beneficial over individual purchasing. As part of the framework, we model firms' group buying based on their endowed power structures. For each power structure, we derive equilibrium firm behaviors and characterize the conditions under which firms have a group buying incentive. We compare the group buying behaviors and performances across different power structures and demonstrate the determinant of power structure: Different power structures may fundamentally alter firms' group buying incentives. Furthermore, different power structures lead to different joint performance and neither form of group buying can dominate the others. Our results suggest that either Nash or Stackelberg group buying between competing firms may achieve Pareto improvement over individual purchasing in the sense that all the parties are better off. One distinctive insight is that when the two firms are highly asymmetric in their market bases, Nash group buying is unattainable due to severe co-opetition conflict and only Stackelberg group buying may be possible. Moreover, under certain conditions, the smaller-firm-led Stackelberg group buying (i.e., the smaller firm moves first and acts as the leader) can be Pareto optimal among all power structures.