Buyer Groups as Strategic Commitments - Assignment Example

Buyer Groups as Strategic Commitments Business dealings and transactions entails individualistic and personal interests, whereby each party seeks to gain from the transaction. While the seller of any product seeks to sell their products at the highest price, which will allow them earn maximum profits, the case is different for the buyers. Every buyer wants to purchase the products of their interests at the cheapest and lowest cost, as it can possibly be (Dana, 2012 p.470). With such interests, both the buyers and the sellers seeks to apply any mechanism that would allow them achieve their goals. While the sellers can form cartels, which affords them an oligopolistic market advantage where they can produce and supply products to the market at prices and quantities that will maximize their profits, the buyers have a different alternative. The formation of buyer alliances, buyer cooperatives, or horizontal mergers for buyers serves to grant them a buyer power (Dana, 2012 p.476). They can then apply this buyer power, to negotiate for lowered price of goods and services they purchase, in that, they can afford to mobilize more capital, thus take advantage of quantity discounts offered, since they can use the pool of capital to purchase in bulk. Alternatively, the buyers can share the costs incurred in the process of purchasing and transporting their products, ensuring that such products are received at low costs possible (Dana, 2012 p.471). It is not more of the sizes of the buyers that collaborate to enhance their buying power, but also about the number of sellers existing for selling the products in that market segment that the buyer groups target. Thus, the topic, Games and Economic Behavior - Buyer groups as strategic commitments is of interest, in that it seeks to create an insight on how the buyers can collaborate to fulfill their goals. This is a topic of interest to both the buyers and the sellers, in that it can help them understand how different forms of collaborations enhance the buyer’s power. A manager of a firm dealing in the wholesale or distributing business will find this research very important, in that it will help such managers to understand how they can engage in any form of buyer alliances, mergers, and cooperatives, to enhance their buyer power and ensure they purchase their products at lower prices. The understanding of the ways in which they can establish relationships with other buyers in dealing with similar products is very vital for such managers, since it will help them select the nature of collaboration they would want to engage in either, mergers, purchasing alliances, or buyer cooperatives (Dana, 2012 p.472). This research is also important to such managers, in that it can help them understand the organizations, which they can join, if the buyers cannot indentify buyers whom they can collaborate with to enhance their buyer’s power. The research is also of importance to such managers, in that it goes a long way in helping them understand the advantages and disadvantages associated with such collaborations, so they can opt for either engaging on them, or undertaking the purchases on their own. According to the article, Buyer groups as strategic commitments, firms will always form purchasing alliances or merge with others in order to secure lower prices for their commodities (Dana, 2012 p.470). These relationships are established on a formal and long-term basis, which allows such firms to negotiate continuously for lower prices for the commodities they purchase, courtesy of the buyers power they wield. Such collaborations include the Independent Grocers’ Association in the USA, which has effectively negotiated with large food manufacturers for lower prices of the commodities they purchase from them. Other examples of such collaborations include the cable television franchises and the pharmaceutical companies, which have established groupings that negotiate for lower prices. The case is the same for chain of supermarket in Europe, which collaborates with chain stores to increase their buyer power and thus negotiate for lower prices from the manufacturers or the suppliers that supplies them with commodities. In a setting where there is a single seller, buyer’s collaboration has the effects of leaving the buyers better off, as compared to the buyers who undertakes their purchases individually (Dana, 2012 p.470). While the suppliers can lower the prices of a given product for a buyer and increase, and maintain higher prices for other commodities, the sole buyer will be at a disadvantage compared to the buyers who have collaborated in a group. This is because, the single buyer will have no alternative but purchase the product at a higher price, while the buyers in a group could be purchasing multiple products, depending on the nature of the buyers who have collaborated and their line of business. This way, they attain economies of scale by spreading the higher price over various commodities and various buyers (Dana, 2012 p.477). Thus, the motivation for collaborating by buyers is not the number of buyers, but the composition of different buyers, requiring different products, who can all purchase them from the same seller. The benefit obtained by buyers who purchase as a group, through collective bargaining is greater, when such buyers have private information. In a multiple seller setting, a buyer group is better off, when it can manage to purchase exclusively from either of two suppliers (Dana, 2012 p.472). According to the article, there is an assumption by others, that the exclusive rights to purchase from either of these two suppliers will increase the competition between the suppliers, thus making the buyer group wield a higher negotiating power, thus achieving lower prices for the commodities they purchase. In contrast to this viewpoint, the paper argues that it is the composition of the buyers and not their sizes or numbers, that determines the effectiveness of the exclusive purchase agreements established. Another contrary opinion of this article, different from other viewpoints, is that, the groups of buyers are better off while dealing with more than two sellers (Dana, 2012 p.475). However, a great effect on price reduction is based on the number of buyers who collaborate, as opposed to buyers’ composition. In establishing these findings, the article applies various assumptions. The first assumption is that the sellers have full information about the preferences that the buyers hold. Another assumption is that the buyers are governed by a contractual agreement to purchase from the specified seller, at the agreed group prices and that the agreement have specified the payments transferable to or from the buyers (Dana, 2012 p.474). Another of the assumption made by the article is that the buyers have a range of feasible groups from which to select which one to join, and that a group only forms if there is enough number of buyers to form such a group. More to the assumptions is that the coalition proof sub-game perfect Nash Equilibrium (CP-SPNE) consists of a group of buyers who have made buying decisions, which affects all buyers equally, with no buyer who could be better off purchasing individually and without any better feasible groups that the buyers can opt to join. More to this, as more buyers join the group, then; the collective bargaining advantage is likely to wane, but the payments made by these buyers is likely to neutralize the fall in this advantage, leaving the group neither worse nor better off (Dana, 2012 p.479). The strong point associated with this article is the fact that, it goes an extra mile to look into the advantage of the different composition of the buyers, based on the nature of their product needs. According to the article, the buyer groups formed based on different nature of buyers need is more effective in attaining collective bargaining for price reduction, as opposed to a buyer group consisting of unanimous buyer needs (Dana, 2012 p.482). This is a strength, in that many research has based their findings on the buyer groupings based on their sizes and numbers. However, the paper has a weakness, being the fact that the assumptions made by this article may not be empirically applicable in the real life situation. More to the weakness, if the assumptions that the buyers purchase from a single seller applies, then this will serve to give the seller more power, effectively lowering the collective bargaining power the buyer may have in forming such buyer groups. Based on the article, some extensions are worth covering if a follow up paper is to be written. The first extension would be, to critically assess and analyze the real advantage that is associated in forming the buyer groups based on composition of different products needs, as opposed to the sizes and numbers of the buyers. This is useful in that many buyer groups are established based on the commonality and unanimity of their needs. The other extension that is worth covering in a follow up paper is how applicable and practical the assumptions made by this paper are, and what would be the effect of eliminating or replacing such assumptions to the findings of this study. This is vital since it will serve to show the applicability of the findings of this article in a real life situation. An insight that is deliverable to the manager is that composition of buyers, as opposed to size and numbers, is a vital aspect of forming buyer groups. Work Cited Dana, James. Games and Economic Behavior: Buyer groups as strategic commitments. Department of Economics and College of Business Administration, Northeastern University, 2012. 470-485. Print. Read More