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

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.