Unexpected Motivations behind Joining Group Purchasing Organization (GPO)

Group Purchasing Organizations (GPOs) are commonly motivated by larger volume discounting and cost saving opportunities through economies of scale. We show that group purchasing also has other motivations. These motivations can explain a rather puzzling procurement practice where some large buyers subscribe to the GPO membership, only to later procure directly from the same vendor selling through the GPO. Interestingly, such GPO members often succeed in negotiating a price less than the GPO-negotiated price. The "economies of scale" reasoning suggests that an individual buyer would always be better off purchasing supplies as part of a group rather than on its own. However, we show that the above mentioned practice of renegotiation by large GPO members can be explained by price uncertainties prevailing in the market. We also explain the impact of such renegotiation on the total buyer surplus as well as the surplus of individual buyers of different sizes.