Leader-Based Collective Bargaining: Cooperation Mechanism and Incentive Analysis

Abstract

We study leader-based collective bargaining (LCB), under which a leading buyer (leader) and a following buyer (follower) form an alliance to jointly purchase a common component from a supplier. Although the leader and the follower cooperate in their component purchase, they compete in selling their end products. We first analyze the most common and simple form of LCB, equal price LCB, under which the follower pays to the leader the same wholesale price that the leader obtains from his negotiation with the supplier. We compare each buyer’s profit under the equal price LCB with the benchmark where each buyer purchases separately from the supplier. We find that although the alliance might obtain a lower wholesale price and although the leader is always better off under equal price LCB, the follower can be worse off if the competition intensity of the leader’s and follower’s products is within an intermediate region. We identify a competition effect resulting from equal price LCB that can place the follower at a disadvantage in the competition. This finding implies that the equal price LCB might not be sustainable in practice. In view of this limitation, we investigate an alternative form of LCB, fixed price LCB, under which the follower pays a fixed price to the leader regardless of the wholesale price the leader obtains from the supplier. We show that fixed price LCB benefits not only the leader but also the follower, compared with separate purchases, which implies that fixed price LCB always achieves a win–win outcome for the buyers. Our analysis further shows that even the supplier might benefit from this form of LCB.