Online Procurement Intermediaries with Differentiated Suppliers*

Industrial buyers who seek to procure inputs have the option of contracting the process out to procurement intermediaries. Many of these intermediaries now operate using Internet-based software to enhance the efficiency of their services. We develop a theoretical model of a buyer who wishes to procure an input from one of many differentiated suppliers. The buyer chooses between conducting the procurement herself and hiring a procurement intermediary. We use the model to investigate how and when such procurement intermediaries can be profitable, and to generate insight for the design of the online procurement process with regard to bidder recruitment and information revelation. The model suggests that the profitability of the intermediary relies crucially, on its ability to administer and evaluate quotes from potential suppliers more efficiently than the buyer can herself.