Consumer Equilibrium, Demand Effects, and Efficiency in Group Buying

Abstract

Group buying events, in which the unit price for a good or service declines with higher number of customer sign ups, are increasingly becoming popular for retailing goods and services, especially in emerging markets. This paper theoretically and empirically studies consumer equilibrium, pricing, and efficiency of these events. Modeling a continuous time customer arrival and sign-up process, we start by deriving the stochastic dynamic consumer equilibrium. Based on this equilibrium and utilizing sign-up level data from a major Chinese retailer's group buying events, we then structurally estimate consumer arrival rates and utility distributions for 266 events, and empirically verify the fit and predictive power of the model. Utilizing the estimated arrival rates and consumer utility distributions, we then employ a doubly stochastic two-stage Generalized Linear Regression Model to provide empirical evidence for consumer network effects in group buying, and estimate 16.6% increase in consumer demand attributable to the employment of a group buying mechanism. Through counterfactual analysis, we further estimate that employing group buying increased retailer profits by 11.1%, and with better price and discount selections, it can improve profits by more than 30% on average. We further demonstrate that the retailer is better off by setting low deal discounts for very low and very high consumer arrival rates, suggesting that a bell-shaped deal discount pattern as a function of consumer arrival rate is recommendable when employing group buying events.