Group buying and consumer referral on a social network

Abstract

This paper examines a unique selling strategy, group buying on a social E-commerce platform. We proposed a framework on how to design a group buying strategy in the presence of different social network attributes (different structures, different referral costs, and different network externalities) to examine the following questions: (1) How will the group buying threshold depend on consumer referrals under social networks attributes? (2) What determines the optimal group buying threshold and the group buying price in different social networks attributes? (3) What is the efficiency of group buying with threshold compared to the traditional group buying without referrals and referral reward program? We show that the threshold causes an induction effect, but this induction effect is meaningless when the externality is considerably greater than the referral cost. Moreover, we also show that higher referral costs and prices result in a larger threshold when referral cost and externality have approximate impact on the utility of the focal consumer. We also find that the firm cannot set a low price of group buying even when the referral cost is much higher than the network externality. Finally, we present a sufficient condition that a group buying strategy is better than a referral reward strategy.