Abstract: In the current context of variety and small batch production, group purchasing has been increasingly viewed as an effective tool to save cost and improve performance in manufacturing. Through group purchasing, manufacturers can realize economies of scale by aggregating their purchasing volume. However, in many cases, due to incentive misalignment, group purchasing may create less value than individual purchasing, which makes group purchasing infeasible. To study the value-creating and incentive issues with group purchasing, a supply chain that consists of one group purchasing organization (GPO) and two manufacturers competing in quantity is investigated. The GPO purchases a common component from vendors at a price given by a quantity discount function, and then provides the component for the manufacturers at a transfer price. The manufacturers further process the component to make imperfectly substitutable products. A two-stage Stackelberg game model is used to study the equilibrium decisions. In the first stage, the GPO sets a unified wholesale price of the component for the manufacturers. In the second stage, upon learning the wholesale price, each manufacturer decides his order quantity.
The main work in this paper includes four parts. At first, two benchmark models are established to investigate the scenarios of centralized decision and individual purchasing, respectively, and the feasible condition of group purchasing is analyzed. Secondly, the decentralized decision model of group purchasing with wholesale price contracts is constructed, and by analyzing the impacts of economies of scale, competition intensity and component value on the equilibrium results, the incentive issues for the manufacturers to participate in group purchasing are raised. Thirdly, to address the incentive issues of group purchasing, two contracting schemes for supply chain coordination are presented, and their participation conditions are also checked to show their applicability. Finally, a numerical example is given to illuminate the impacts of the environment parameters on the quantities and the profits under different scenarios.
The results indicate that group purchasing can be feasible relative to individual purchasing only under certain conditions, especially when the component value is higher or the competition is more intense. Group purchasing with wholesale price contracts will not only decrease the value of group purchasing, but also reduce the motivation of the manufacturers to participate in group purchasing, thus they make group purchasing more difficult to be feasible. Although a revenue sharing contracting scheme can achieve the first best value of group purchasing, it cannot satisfy the manufacturers' participation conditions in some cases, especially when the scale economy is lower and the competition is more intense. Instead, a two-part tariff contracting scheme, composed of a membership fee and a trade commission, can not only achieve the first best value of group purchasing, but also satisfy the manufacturers' participation conditions in all cases, thus it can coordinate the supply chain under group purchasing perfectly.
In summary, the value of group purchasing under economies of scale and competition is investigated, which provides a new insight on the incentive issues of group purchasing. Moreover, contracting mechanisms are used to coordinate the supply chain under group purchasing, which offers a practical and a theoretical guidance to improve the value of group purchasing.

Key words: group purchasing, supply chain coordination, economies of scale, differentiated competition, contract design