E-commerce between a large firm and a SME supplier: a screening model

This paper derives a model of screening contracts in the presence of positive network effects when building an electronic commerce network (e-commerce) between a large firm and a small and medium sized enterprise (SME) supplier based on Compte (2008). Compte (2008) main insight is that when several potential candidates compete for the task, the principal will in general improve the performance of his firm by inducing the member candidates to assess their competence before signing the contract (through an appropriate choice of contracts). The large firm (principal) must choose between different SME suppliers (agents) to build a business to business e-commerce network. In the presence of positive network externalities, we show that social surplus increases.