Group Buying: A New Mechanism for Selling Through Social Interactions

• Published in: Management science Vol. 57; no. 8; pp. 1354 - 1372
• Main Authors: Jing, Xiaoqing, Xie, Jinhong
• Format: Journal Article
• Language: English
• Published: Hanover, MD INFORMS 01.08.2011; Institute for Operations Research and the Management Sciences
• Series: Management Science
• Subjects: Applied sciences; Computer science; control theory; systems; Computer systems and distributed systems. User interface; Consumer spending; Consumers; Customer services; Customers; Exact sciences and technology; Firm modelling; Group Buying; Group purchasing organizations; Information sharing; Information systems. Data bases; Internet; interpersonal information sharing; Knowledge sharing; Loyalty programs; Management science; Market strategy; Marketing; Marketing strategies; Memory organisation. Data processing; Online social networks; Operational research and scientific management; Operational research. Management science; pricing; Product life cycle; Profit margins; Referral Rewards programs; Remote searching; Sales; Sales personnel; Selling; Social aspects; Social interaction; Social networks; Software; Studies; Websites; word of mouth; Knowledge engineering; interpersonal information sharing; Costs; Discount; Expert system; Conformity; Modeling; Marketing; Life cycle; Group Buying; Sales; Information communication; Consumer; Confidence; Size effect; Pricing; Culture; Firm strategy; Evaluation; word of mouth; Group size; Social network; Transaction processing; Knowledge transfer; Interactive system; Referral Rewards programs; Social interaction; Internet; Reward
• ISSN: 0025-1909; 1526-5501
• DOI: 10.1287/mnsc.1110.1366

This paper examines a unique selling strategy, Group Buying, under which consumers enjoy a discounted group price if they are willing and able to achieve a required group size and coordinate their transaction time. We argue that Group Buying allows a seller to gain from facilitating consumer social interaction, i.e., using a group discount to motivate informed customers to work as "sales agents" to acquire less-informed customers through interpersonal information/knowledge sharing. We formally model such an information-sharing effect and examine if and when Group Buying is more profitable than (1) traditional individual-selling strategies, and (2) another popular social interaction scheme, Referral Rewards programs. We show that Group Buying dominates traditional individual-selling strategies when the information/knowledge gap between expert and novice consumers is neither too high nor too low (e.g., for products in the midstage of their life cycle) and when interpersonal information sharing is very efficient (e.g., in cultures that emphasize trust and group conformity, or when implemented through existing online social networks). We also show that, unlike Referral Rewards programs, Group Buying requires information sharing before any transaction takes place, thereby increasing the scale of social interaction but also incurring a higher cost. As a result, Group Buying is optimal when interpersonal communication is very efficient or when the product valuation of the less-informed consumer segment is high. This paper was accepted by Preyas Desai, marketing.