From Economies of Scale to Collective Capital

© Adil Kaibaliev N.

Independent small and medium-sized enterprises often occupy a structurally weaker position in procurement than large corporations. This advantage of large firms does not necessarily arise from superior management, products, or entrepreneurial capability. It arises from scale. A large corporation negotiates with suppliers on the basis of aggregated demand, centralized procurement data, professional purchasing teams, predictable order volumes, integrated logistics, and substantial long-term purchasing commitments. When independent firms purchase the same categories of goods separately, that economic power is fragmented among them.

Cooperative purchasing changes this structure without requiring the participating firms to merge. Independent businesses aggregate demand in selected categories through a jointly governed purchasing organization while retaining separate ownership, management, customers, pricing policies, and business strategies.

The economic literature identifies several mechanisms through which such a model can create value: scale effects from higher purchasing volume, stronger buyer bargaining power, lower transaction costs, specialization of the procurement function, shared information, logistics optimization, and more efficient use of infrastructure with high fixed costs. Recent empirical research confirms that these effects are measurable. Dubois, Lefouili, and Straub (2021) show that centralized procurement can lower purchase prices by strengthening the buyer’s bargaining position and increasing transaction volume. Lin and Wang (2025), using data from U.S. hospitals, estimate that a one-standard-deviation increase in the scale of a group purchasing organization reduces supply expense per discharge by approximately 2.7 percent. Jisan, Castel, and Nicolae (2026) likewise find that larger group-purchasing networks are associated with lower inventory costs and lower overall operating expenses.

The historical experience of Ace Hardware, Wakefern Food Corp., Associated Wholesale Grocers, and Do it Best demonstrates that aggregation of purchasing demand can evolve from a cost-reduction mechanism into a full commercial infrastructure encompassing wholesale distribution, warehousing, logistics, member distributions, and internal capital accumulation.

The article’s central proposition is economic: fragmented demand is a latent asset. When recurring demand is aggregated through an effectively governed institution, ordinary procurement expenditure can be converted into bargaining power, operating efficiency, distribution income, infrastructure, and ultimately investment capital.

Keywords: purchasing power, jointly owned distribution company, distribution margin, capital accumulation

Consider a market in which fifty independently owned trucking companies operate.

Each purchases tires, truck and trailer parts, cargo-securing equipment, lubricants, maintenance consumables, service-shop equipment, safety supplies, software, uniforms, and other regularly consumed inputs.

If these companies purchase independently, fifty separate procurement processes arise. Each business searches for suppliers, requests quotations, establishes credit relationships, negotiates freight charges, processes invoices, monitors supplier quality, and develops its own procurement information.

Yet from the supplier’s perspective, these fifty firms may collectively represent a substantial market.

The fragmentation lies not in the demand itself, but in the way that demand is organized.

A purchasing organization changes the economic unit with which the supplier interacts: instead of fifty buyers making fifty independent decisions, there is one aggregated purchasing platform representing the demand of fifty independent enterprises.

That distinction has direct economic consequences.

Pierre Dubois, Yassine Lefouili, and Stéphane Straub examined procurement data for forty important pharmaceutical products across seven countries. Their 2021 study in the European Economic Review shows that centralized procurement produces lower prices. Their theoretical and empirical analysis identifies two related mechanisms: concentration of demand strengthens the buyer’s bargaining position, while larger transaction quantities create additional scale advantages. When suppliers themselves are highly concentrated, the price effect weakens, confirming that purchasing power depends on market structure on both sides of the transaction (Dubois, Lefouili, & Straub, 2021).

At the level of the underlying economic mechanism, this conclusion extends beyond pharmaceuticals. When demand is fragmented, suppliers negotiate with many small buyers. When demand is aggregated, the buyer enters negotiations with a substantially larger commercial commitment. The procurement function itself therefore exhibits economies of scale.

Ronald Coase’s theory of the firm provides a fundamental institutional explanation for this model. Markets are not costless coordination mechanisms. Searching for suppliers, obtaining information, negotiating, contracting, monitoring performance, and resolving problems all consume resources. Firms organize selected activities within their own structures when internal coordination is more efficient than repeatedly conducting the same activities through market transactions (Coase, 1937).

Cooperative purchasing applies the same logic across organizationally independent firms. Participants do not need to combine their entire businesses. They combine only the function in which scale has economic value.

The structure can be expressed as follows:

  Figure 1. Cooperative purchasing as selective integration

For small and medium-sized enterprises, this distinction is fundamental. A trucking company retains control of its fleet; a heavy-truck service shop retains control of its customers and operations; a restaurant retains control of its brand; and a construction company retains control of its contracts. Only the function in which repeated duplication creates measurable costs is centralized.

Recent literature describes this structure as horizontal collaboration among organizations occupying comparable positions in a supply chain.

Soysal, Belbağ, and Erişkan (2022) analyze precisely such a structure: a supply-and-distribution cooperative serving a group of small and medium-sized enterprises. In their model, the cooperative aggregates demand, purchases in bulk at discounts unavailable to individual members, and organizes subsequent distribution. Their quantitative analysis shows that the economic outcome depends primarily on the purchasing discount, the volume of demand, the design of the logistics network, and distribution costs (Soysal, Belbağ, & Erişkan, 2022).

This study is particularly relevant to trucking companies, heavy-truck service shops, restaurants, and construction businesses because it treats procurement and distribution as a single system rather than separating the price discount from logistics.

3.1 Economies of Scale in Procurement

The first mechanism is the most direct. For a supplier, a customer with large and recurring purchasing volume represents greater commercial value than a buyer placing small, irregular orders. Larger purchases can reduce the supplier’s unit costs of selling, administration, forecasting, delivery, and inventory management. This creates economic room for volume-based pricing.

Dubois and co-authors (2021) provide empirical support: centralized buyers obtain lower prices, and larger transaction volume is one of the channels through which this effect is generated.

3.2 Buyer Bargaining Power

Scale changes the bargaining relationship. A firm purchasing $20,000 of goods per year has limited influence over a manufacturer generating hundreds of millions of dollars in revenue. A purchasing organization representing $20 million of annual demand enters negotiations from a materially different position.

The effect extends beyond unit price to freight charges, payment terms, volume bonuses and discounts, warranties, service levels, inventory commitments, minimum order quantities, product customization, and access to direct manufacturer relationships. Contemporary procurement research continues to treat demand aggregation through joint purchasing arrangements and consortia as a means of strengthening the buyer’s negotiating position.

3.3 Reduction of Duplicated Transaction Costs

Product price is only one component of procurement cost. If twenty businesses independently identify suppliers, qualify them, request quotations, verify prices, negotiate payment terms, place orders, track deliveries, reconcile invoices, and resolve warranty issues, much of the same work is performed twenty times.

In accounting records, these costs often appear as payroll and overhead rather than as purchase cost. Economically, however, they are procurement costs. Centralizing selected functions allows one specialized purchasing team to serve several operating companies. The benefit arises through specialization and elimination of duplication.

3.4 Information Economies

An individual company sees only its own purchasing history. A purchasing organization can observe the behavior of the entire network. This creates a richer body of data on supplier pricing, consumption, seasonality, product reliability, lead times, inventory turnover, regional demand, and price movements.

Information strengthens bargaining capacity and improves forecasting. It also helps determine which categories should rationally remain decentralized and which have sufficient common demand to justify centralized procurement.

3.5 Logistics Economies

As procurement scale increases, the economics of logistics also changes. A company ordering a few pallets may have to rely on a regional distributor. An organization able to assemble container-scale shipments may gain access to direct importation. A single service center can rarely justify a regional parts warehouse on its own; a network of service shops and trucking companies may generate enough demand to support such infrastructure.

The economic sequence then becomes:

Figure 2. Inventory and logistics effects of aggregated purchasing

Soysal and co-authors (2022) directly model the relationship between volume discounts and distribution costs. Their results show that the benefit of collaboration increases when procurement and logistics systems are designed jointly.

3.6 Sharing Fixed Costs

Professional procurement infrastructure carries significant fixed costs. A developed organization may employ category managers, analysts, logistics and import specialists, accountants, quality-control personnel, and purchasing managers. A small business cannot economically reproduce this function on its own. A network of one hundred companies can spread fixed costs across a substantially larger purchasing base.

This is one reason large corporations can develop procurement capabilities that are unavailable to individual small firms. Cooperative purchasing allows independent businesses to obtain part of this structural advantage without giving up ownership.

Research published since 2021 has substantially strengthened the empirical foundation of the model.

 

The importance of these findings lies partly in the diversity of methods: industrial-organization analysis and econometrics, systematic review, mathematical supply-chain modeling, institutional analysis, and large-sample studies of U.S. organizations.

Parmaksiz and co-authors (2022) screened 1,596 publications and included 44 empirical studies in their systematic review. In 64 percent of the pooled-procurement mechanisms examined, cost containment was a stated primary objective. The authors identify three institutional conditions for success: sufficient capability among participating buyers; a technically and financially capable purchasing organization with operational autonomy; and adequate commercial incentives for suppliers, including meaningful market volume and reliable payment (Parmaksiz et al., 2022).

The purchasing organization itself is therefore an economic asset, and the quality of its institutional design affects the group’s ability to realize economies of scale.

Ace Hardware provides one of the clearest U.S. examples. In 1924, a small group of hardware-store owners in the Chicago area created a purchasing group so that individual stores could buy merchandise in larger quantities at lower cost. The stores themselves remained independently owned. The economic structure was as follows:

Figure 3. Collective purchasing and retail competitiveness

The significance of the Ace model lies precisely in the preservation of entrepreneurship. Local stores retained ownership, while the purchasing institution created scale on their behalf. A structural disadvantage of small business—limited individual purchasing volume—was converted into a collective competitive asset. The durability of the model is itself significant: a structure established in 1924 continues to operate more than a century later.

Wakefern demonstrates the same mechanism even more directly. After the Second World War, independent grocery stores faced increasing competition from large self-service supermarkets.

In 1946, eight independent grocers in New Jersey pooled resources so they could purchase larger quantities of goods at lower cost. After a successful trial period, each member invested $1,000 to establish Wakefern Food Corp.

The decisive institutional step was capitalization. The entrepreneurs did not stop at a temporary group discount arrangement. They created a company. Their procurement expenditure began to support an institution that they themselves owned.

The economic sequence became:

Figure 4. Building a commercial system through purchasing demand

Wakefern subsequently became one of the largest retailer-owned cooperative structures in the United States while member companies retained independent ownership of their supermarkets. The case clearly illustrates the distinction between merging companies and aggregating purchasing power.

Associated Wholesale Grocers provides the strongest example of the next stage of the model: converting procurement activity into distributable and retained capital.

AWG is wholly owned by its participating retail members. Its business model aggregates the purchasing volume of independent grocery retailers and operates a large wholesale-distribution system on their behalf. The organization states that earnings are returned to retail members through annual cooperative distributions.

AWG’s audited 2020 financial statements provide a quantitative sense of the mechanism’s scale. Consolidated sales were approximately $10.6 billion. Annual cooperative distributions to members after retainage were approximately $254.4 million.

Economically, this differs from obtaining a discount from an outside wholesaler. Member companies are simultaneously customers of the wholesale organization and its owners. A portion of the economic result generated by distribution can therefore return to the same businesses whose purchasing volume supports the system.

AWG’s financial structure also illustrates the coexistence of member distributions and internal capitalization: part of cooperative income is distributed to members, while part may be retained or represented through member certificates and capital accounts.

A capital-accumulation mechanism is therefore created:

 

Figure 5. From member purchasing to capital formation

The purchasing organization evolves from a cost center into an institution capable of generating capital.

The history of Hardware Wholesalers, Inc., now Do it Best, illustrates the transition from purchasing cooperation to physical infrastructure.

The organization was established in 1945 by one hundred independent business owners from Illinois, Indiana, Michigan, and Ohio. Collective purchasing enabled members to obtain more favorable volume pricing.

The organization then moved beyond negotiation over purchase prices. In 1948 it established its first warehouse, and in 1955 it created its own truck-delivery system.

This sequence is economically important. The initial asset was aggregated purchasing demand. That demand justified a wholesale organization; the wholesale organization justified warehouse infrastructure; and the warehouse infrastructure justified a specialized transportation system. Each additional layer reduced dependence on external intermediaries and expanded the productive capabilities of the combined system.

A broader principle follows: collective purchasing power can finance capabilities that no individual participant would rationally build on its own.

The most meaningful economic model does not end with obtaining a supplier discount.

Assume that a group of independent trucking companies currently purchases standardized products through outside distributors. The price paid by the operating business includes:

Figure 6. Formation of the final purchase price through an external distributor

If the same companies establish their own purchasing and distribution structure, the formula changes:

Figure 7. Formation of the final purchase price within a member-owned structure

The fundamental change concerns ownership of the residual economic value. The profit of an outside distributor belongs to outside owners. The residual profit of a distributor owned by the participants belongs, directly or indirectly, to the same businesses that generate the demand.

The real economic costs of distribution do not disappear. Warehousing, personnel, transportation, financing, information systems, inventory losses, and administration remain genuine expenses.

What changes is the ownership of the residual value after those costs have been covered.

A member’s economic benefit can be expressed as follows:

Figure 8. Economic benefit to a participant

When this value is positive and sustainable over time, the organization creates genuine economic synergy.

 9.1 Illustrative Economic Model: From External Distribution Margin to Member-Owned Economic Benefit

To illustrate the mechanism, consider a hypothetical group of 26 independent businesses: 10 trucking companies with annual purchases of $500,000 each; 5 heavy-truck service shops with annual purchases of $350,000 each; 4 restaurants with annual purchases of $70,000 each; and 7 construction companies with annual purchases of $250,000 each.

The combined annual purchasing volume of these businesses is $8,780,000.

The model assumes that the relevant goods are currently purchased from external suppliers and distributors. To assess the possible economic effect, the analysis examines hypothetical gross distribution margins ranging from 20 to 40 percent. These percentages are used solely as scenario assumptions for sensitivity analysis.

Gross distribution margin	Estimated acquisition cost of goods	Gross margin in monetary terms	Operating cost of the common purchasing and distribution company	Net collective economic benefit
20%	$7,024,000	$1,756,000	$800,000	$956,000
25%	$6,585,000	$2,195,000	$800,000	$1,395,000
30%	$6,146,000	$2,634,000	$800,000	$1,834,000
35%	$5,707,000	$3,073,000	$800,000	$2,273,000
40%	$5,268,000	$3,512,000	$800,000	$2,712,000

Thus, the formula will be as following: Net collective economic benefit = gross distribution margin retained within the jointly owned company − additional costs of operating that company.

Assuming annual operating costs of $800,000 for the common purchasing and distribution company, break-even is reached at a gross distribution margin of approximately 9.11 percent of total purchasing volume: $800,000 ÷ $8,780,000 = 9.11%.

Under this cost structure, the model therefore begins to produce a positive economic result once the gross margin retained within the jointly owned company exceeds approximately 9.1 percent of total purchasing volume.

Conservative Scenario — 20% Margin

At a 20 percent gross distribution margin, the $8.78 million purchasing base contains approximately $1.756 million of gross distribution margin. After covering $800,000 of assumed annual operating expenses, approximately $956,000 of net collective economic benefit remains.

Thus, even under the most conservative scenario, the model produces a positive result approaching $1 million per year.

This scenario shows that the structure may remain economically viable even at a comparatively modest distribution margin. The point is not that participants automatically “save 20 percent,” but that part of the value previously captured elsewhere in the supply chain can, after necessary operating costs are covered, remain within an institution owned by the participants.

Base Scenario — 30% Margin

At a 30 percent gross margin, the margin in monetary terms is $2.634 million.

After $800,000 of operating expenses, net collective economic benefit is $1.834 million per year.

This is approximately 20.9 percent of the original aggregate purchasing volume. If half of the result is distributed to members and half retained for further development, $917,000 can be distributed to participants and another $917,000 can remain in the company as retained earnings.

Procurement activity therefore creates both current income for the owners and capital for the further development of the common structure.

Upper Scenario — 40% Margin

At a 40 percent gross distribution margin, the monetary value of the margin reaches:

$3.512 million. After $800,000 of annual operating expenses, approximately $2.712 million of net collective economic benefit remains.

A 40-percent scenario may be attainable in product categories where procurement is managed particularly well and the gap between acquisition cost and the external distributor’s final selling price is large. Its analytical purpose is to show the model’s sensitivity to the existing distribution margin.

The economic significance of the model therefore lies not only in the possibility of purchasing goods at lower prices. The more consequential change is that part of the economic result previously retained by an external supplier or distributor can, after all necessary costs are covered, remain inside a company owned by the buyers themselves.

A participant can therefore benefit not only as a buyer but also as an owner of a link in the supply chain. If a portion of profit is retained rather than distributed and is used to increase inventory, acquire warehouse capacity, develop logistics, implement information systems, or launch new activities, recurring procurement expenditure gradually becomes a source of productive capital formation.

This transition—from recurring expenditure to ownership of the economic value generated by that expenditure—is the central mechanism of the model.

At this stage, cooperative purchasing becomes strategically more significant than a conventional discount program.

Assume that the member-owned organization generates $2 million in annual net economic surplus. The entire surplus need not be distributed immediately. One portion may be returned to members, while another may be retained as capital.

That capital can finance assets that strengthen the same economic system: distribution centers, inventory, technology platforms, private-label products, import operations, repair businesses, real estate, production equipment, or new complementary lines of business.

The process becomes cyclical:

Figure 9. The self-reinforcing economic cycle of the integrated system

A compounding accumulation mechanism is thereby created. The initial source of capital is not an external investor, but the pre-existing economic activity of the participating firms.

The conceptual shift is that procurement is no longer viewed exclusively as an expense. Under shared ownership, part of the purchasing flow becomes revenue for an institution owned by the buyers themselves. Recurring expenditure becomes one source of recurring capitalization.

The model has especially clear application where numerous independently owned companies operate in industries with recurring and partially overlapping purchasing needs.

A network comprising trucking companies, heavy-truck service shops, construction firms, and restaurants should not attempt to centralize every product category within one undifferentiated system. A common ownership platform with several specialized procurement divisions is economically more efficient.

Trucking companies and service shops form a natural purchasing pool for tires, trailer components, cargo-securing equipment, consumables, oils, filters, tools, and selected equipment. Construction companies form another pool around materials, safety supplies, equipment, and consumables. Restaurants form a separate pool for food products, packaging, cleaning supplies, kitchen equipment, and logistics.

There is also a group of cross-industry expenditures: telecommunications, payment-processing services, software, uniforms, office supplies, selected professional services, and other standardized categories.

The economic basis for integration is not national or ethnic identity but measurable overlap in demand. Social and cultural proximity may reduce the initial cost of building trust, but long-term viability depends on procurement economics.

Recent research shows that scale alone is insufficient to create a durable purchasing institution.

Parmaksiz and co-authors (2022) identify technical and financial capability, institutional autonomy, adequate supplier incentives, and reliable payment as key conditions for effective pooled procurement. Madsen (2024) reaches a similar conclusion from the perspective of collective action: participants in durable purchasing groups voluntarily contribute resources and expertise because the quality of common agreements depends on collective input.

A professional purchasing organization therefore requires transparent ownership, professional management, audited financial reporting, standardized procurement data, clear voting rights, conflict-of-interest rules, a transparent policy for profit or dividend distributions, rules for retaining earnings, measurable purchasing commitments, and professional category management.

Institutions of this kind transform informal cooperation into a durable economic organization.

Research and historical experience point in the same direction. The advantage of a large corporation lies not only in greater capital. A large firm aggregates economic activity: purchasing, information, logistics, professional expertise, and capital.

Independent small and medium-sized enterprises generally possess the same types of resources, but in fragmented form. A purchasing alliance partially reproduces the economic architecture of a large corporation while preserving entrepreneurial decentralization.

This helps explain why the models represented by Ace Hardware, Wakefern, AWG, and Do it Best have endured for decades. They combine two characteristics often mistakenly treated as incompatible: the adaptability and incentives of independent ownership with the economies of scale of a large organization.

The economic case for cooperative purchasing is supported by both recent research and long-term business practice.

Dubois, Lefouili, and Straub (2021) show that centralized procurement lowers prices through concentration of purchasing power and larger transaction volumes. Parmaksiz and co-authors (2022), synthesizing 44 empirical studies, show that cost containment is one of the dominant objectives of pooled procurement and that effectiveness depends on institutional capability. Soysal, Belbağ, and Erişkan (2022) model a structure directly applicable to small and medium-sized enterprises: a joint purchasing-and-distribution cooperative that obtains wholesale discounts unavailable to individual members and distributes products through a common logistics system. Madsen (2024) shows that participants in purchasing groups can overcome collective-action problems and contribute resources to common purchasing agreements. Lin and Wang (2025) provide contemporary U.S. evidence: greater scale in group purchasing organizations reduced hospital supply expense per discharge by approximately 2.7 percent. Jisan, Castel, and Nicolae (2026) further associate larger group-purchasing networks with lower inventory costs and lower operating expenses.

Historical experience reaches the same conclusion from another direction. Ace Hardware began by aggregating the purchases of independent hardware stores. Wakefern emerged when eight independent grocers combined purchasing volume and capitalized a common company. Associated Wholesale Grocers shows that member purchasing volume can generate substantial earnings while supporting a large distribution system. Do it Best demonstrates the subsequent transition from collective purchasing to proprietary warehousing and specialized logistics.

The economic mechanism can be stated sequentially: fragmented demand is latent purchasing power; aggregated demand creates bargaining power; bargaining power and scale create procurement savings; procurement savings support distribution; distribution creates operating surplus; retained surplus becomes capital; and capital finances new productive capabilities.

The key economic innovation lies not in merging the participating companies, but in institutionally integrating their purchasing power.

When independent firms retain entrepreneurial autonomy in their own markets while jointly owning an institution that purchases, distributes, and reinvests capital on their behalf, recurring operating expenditure can become a mechanism for long-term collective capital accumulation.

Ahmadi, A., Heydari, M., Pishvaee, M. S., & Teimoury, E. (2021). Multi-level decision making for chain stores including GPOs (group purchasing organizations). Computers & Operations Research, 135, 105433. https://doi.org/10.1016/j.cor.2021.105433

Coase, R. H. (1937). The nature of the firm. Economica, 4(16), 386–405. https://doi.org/10.1111/j.1468-0335.1937.tb00002.x

Dubois, P., Lefouili, Y., & Straub, S. (2021). Pooled procurement of drugs in low and middle income countries. European Economic Review, 132, 103655. https://doi.org/10.1016/j.euroecorev.2021.103655

Dyer, J. H., & Singh, H. (1998). The relational view: Cooperative strategy and sources of interorganizational competitive advantage. Academy of Management Review, 23(4), 660–679. https://doi.org/10.5465/amr.1998.1255632

Jisan, A. H., Castel, M. J., & Nicolae, M. (2026). Hospital use of group purchasing organizations: A cost effect analysis. International Journal of Healthcare Management, 19(2), 359–370. https://doi.org/10.1080/20479700.2025.2496985

Lin, H., & Wang, Y. (2025). The value of group purchasing: Evidence from the U.S. hospital industry. Journal of Public Economics, 247, 105380. https://doi.org/10.1016/j.jpubeco.2025.105380

Madsen, M. S. (2024). Intergovernmental cooperation and joint purchasing agreements: Do governments free-ride? Public Administration Review, 84(4), 604–622. https://doi.org/10.1111/puar.13727

Parmaksiz, K., Pisani, E., Bal, R., & Kok, M. O. (2022). A systematic review of pooled procurement of medicines and vaccines: Identifying elements of success. Globalization and Health, 18, 59. https://doi.org/10.1186/s12992-022-00847-z

Soysal, M., Belbağ, S., & Erişkan, S. (2022). Horizontal collaboration among SMEs through a supply and distribution cooperative. The Open Transportation Journal, 16, e187444782208101. https://doi.org/10.2174/18744478-v16-e2208101

Teece, D. J. (1986). Profiting from technological innovation: Implications for integration, collaboration, licensing and public policy. Research Policy, 15(6), 285–305. https://doi.org/10.1016/0048-7333(86)90027-2

Ace Hardware Corporation. (n.d.). About Ace Hardware Corporation. https://www.acehardware.com/about-us

Associated Wholesale Grocers, Inc. (2021). 2020 annual report. https://awginc.com/wp-content/uploads/2023/04/2020-AWG-Annual-Report.pdf

Associated Wholesale Grocers, Inc. (n.d.). Membership. https://awginc.com/membership/

Do it Best. (2024). Do it Best, United Hardware announce merger, strengthening commitment to independent retailers. https://www.doitbestonline.com/2024/do-it-best-united-hardware-announce-merger-strengthening-commitment-to-independent-retailers/

Wakefern Food Corp. (n.d.). Who we are. https://www2.wakefern.com/who-we-are/