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

TL;DR

This paper models screening contracts in e-commerce networks between large firms and SME suppliers, showing that competition and positive network effects enhance social surplus and firm performance.

Contribution

It introduces a screening model for e-commerce contracts considering positive network effects, extending Compte's (2008) framework to B2B interactions.

Findings

Screening contracts improve firm performance in e-commerce networks.

Positive network externalities increase social surplus.

Competitive selection among SMEs benefits the principal.

Abstract

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.