Group Buying: A New Mechanism for Selling Through Social Interactions

Xiaoqing Jing () and Jinhong Xie ()
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Xiaoqing Jing: College of Management, Georgia Institute of Technology, Atlanta, Georgia 30308
Jinhong Xie: Warrington College of Business, University of Florida, Gainesville, Florida 32611

Management Science, 2011, vol. 57, issue 8, 1354-1372

Abstract: 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.

Keywords: Group Buying; word of mouth; interpersonal information sharing; Referral Rewards programs; pricing; social interaction; marketing; Internet (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (71)

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