Collaborative procurement among competing buyers

Collaborative procurement emerged as one of the many initiatives for achieving improved inter-firm coordination and collaboration. In this article, we adopt a game-theoretical approach to study the interaction between two firms who procure jointly, but produce independently and remain competitors in a product market characterized by price-sensitive demand. We study the underlying economics behind collaborative procurement, examine the effects of collaboration on buyer and supplier profitability, and derive conditions under which collaboration is beneficial to each participant. We find that a necessary and sufficient condition for a buyer to collaborate is to increase its sales. We identify the conditions that lead equal size buyers (i.e., consortia consisting of only large buyers or only small buyers) versus different size buyers to collaborate, We also determine the conditions that make collaboration profitable for the Supplier, and show that rather than selling a large quantity to a single buyer, the supplier prefers to sell to multiple buyers in smaller quantities. (C) 2008 Wiley Periodicals. Inc.