Consumer-Driven Group Buying: Trick or Treat to Retail Stores?

Abstract

Group buying (GB) has emerged and evolved into various forms over the past decade. We investigate a distinct form of GB, namely consumer-driven group buying, whereby some consumers form purchase groups to visit stores together and negotiate for discounts. We refer to these consumers as GB consumers that differ from regular consumers who visit stores individually and pay regular prices. Visited by a purchase group, a store has to make an immediate decision to serve their demand in its entirety. Turned down by the first store it visits, the purchase group continues to visit the other store. After accommodating GB demand, the stores use remaining stocks to serve regular consumers. We demonstrate that GB can be a treat to stores that adopt proper policies to utilize it as an instrument to reach consumers. The stores are able to accommodate group demand at a price lower than regular price in most circumstances but still manage to earn stable profits. The presence of regular consumers has a subtle effect on equilibrium formation, by strengthening the stores’ power in negotiating with GB consumers to make group price weakly increase with group size. Moreover, competing stores are able to manipulate the interactions between purchase groups and collectively earn a higher total profit than a monopolist store when GB consumers account for a small fraction of market base and competition is intense.