Group Buying on the Web: A Comparison of Price-Discovery Mechanisms

Web-based Group-Buying mechanisms, a refinement of quantity discounting, are being used for both Business-to-Business (B2B) and Business-toConsumer (B2C) transactions. In this paper, we survey currently operational online Group-Buying markets, and then study this phenomenon using analytical models. We surveyed over fifty active Group-Buying sites, and provide a comprehensive review of Group-Buying practices in the B2B, B2C and non-profit sectors, across three continents. On the modeling side, we build on the coordination literature in Information Economics and the quantity-discounts literature in Operations to develop an analytical model of a monopolist who uses web-based Group-Buying mechanisms under different kinds of demand uncertainty. We derive the monopolist's optimal Group-Buying schedule, and compare his profits with those that obtain under the more conventional posted-price mechanism. We also study the effect of heterogeneity in the demand regimes, in combination with uncertainty, on the relative performance of the two mechanisms. We further study the impact of the timing of the pricing decision (vis-à-vis the production decision) by modeling it as a two-stage game between the monopolist and buyers. Finally, we investigate how Group-Buying schemes compare with posted price markets when buyers can revise their prior valuation of products based on information received from third parties (infomediaries). In all cases, we characterize the conditions under which one mechanism outperforms the other, and those under which the posted price and Group-Buy mechanisms lead to identical seller revenues. Our results have implications for firms' choice of price discovery mechanisms in electronic markets and scheduling of production and pricing decisions in the presence (and absence) of scale economies of production. 1 Email: [email protected]; Tel: (215) 898 1175. 2 Email: [email protected]; Tel:(215) 573 5677.