Market Share Contracts in B2B Procurement Settings with Heterogeneous User Preferences
By Ravi Mantena, Rajib Saha
Production and Operations Management | March 2022
DOI
doi.org/10.1111/poms.13611
Citation
Mantena, Ravi., Saha, Rajib. (2021). Market Share Contracts in B2B Procurement Settings with Heterogeneous User Preferences Production and Operations Management doi.org/10.1111/poms.13611.
Copyright
Production and Operations Management, 2021
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Abstract
Market share contracts, a form of loyalty discounts, where the discount is contingent on the buyer meeting or exceeding a target share of total procurement, are common in many B2B settings. We study the impact of such contracts on demand allocation, prices, and welfare in a setting where a single central B2B buyer procures multiple units of a product on behalf of a set of users with heterogeneous preferences. We find that linear pricing creates a demand distortion, which goes away with the use of market share contracts. These contracts serve as strategic tools for vendors whose products are strongly preferred by a substantial fraction of the users in the buying organization to shift the locus of competition and extract away rents from weaker rivals, and sometimes from buyers. The impact of such contracts on the welfare of the buyers is therefore ambiguous, but when these contracts are used, the overall surplus goes up as disutility from demand distortion is avoided. While both quantity threshold contracts and two-part tariffs can replicate the efficiency properties of market share contracts when demand is deterministic, they cannot guarantee the avoidance of demand distortion when buyer demand is uncertain.

Rajib Saha is an Associate Professor of Information Systems at the Indian School of Business (ISB). He works broadly in the areas of Economics of IT and IT-enabled business models and data mining. His research explores questions related to crowds and platforms, pricing and operationalisation of digital goods, B2B contracts, network analytics, and more.

Prior to joining ISB, he taught graduate-level courses in the area of Operations Management and Information Systems at the University of Rochester, and worked in the IT industry for several years at organisations such as Oracle and Novell.

Professor Saha received his MS and PhD in Business Administration from the University of Rochester, New York and B.Tech. in Computer Science and Engineering from the Indian Institute of Technology, Kharagpur.

Rajib Saha
Rajib Saha