Rothkopf Pibernik Maverick Buying

Rothkopf & Pibernik – Maverick Buying: Eliminate, Participate, Leverage?

Abstract: In recent years many companies have made an eort to consolidate purchasing volumes that were previously scattered across different organizational units with the objective to achieve lower purchasing prices, lower transaction costs, etc. To realize these benefits companies frequently opt for a hybrid organizational structure. A central purchasing department negotiates frame contracts based on consolidated purchasing volumes from which local (de-central) business units are required to order. This organizational setup is conducive to a specific form of non-compliant behavior, oftentimes referred to as maverick buying: local business units bypass the official purchasing processes and source from a supplier other than the designated one. This non-compliant behavior obviously counteracts the companies' efforts to achieve benefits of volume consolidation. In this paper we consider maverick buying as a specific form of hidden action in a principal agent framework and provide a formal analysis of different strategies that companies can employ to remedy its negative consequences. Our results suggest that the conventional strategy of monitoring agents and penalizing them in case of non-compliance has clear limitations and may, in fact, be ineffective. We argue that rather than trying to eliminate maverick buying through monitoring, it can, under certain conditions, be more effective to participate in the agents' superior market knowledge. To this end we propose a self-selection model in which the principal offers distinct contract menus - termed participation menus - which are tailored toward agents with an attractive outside option and agents without an incentive to buy maverick. We demonstrate that participation menus perform particularly well in situations in which conventional monitoring fails. Our results indicate that there may even be situations in which they can be employed to leverage the agents' purchasing capabilities so that profits exceed those of a traditional first-best solution.