Group Buying of Competing Retailers

Abstract

Under group buying, quantity discounts are offered based on the buyers' aggregated purchasing quantity, instead of individual quantities. As the price decreases with the total quantity, buyers receive lower prices than they otherwise would be able to obtain individually. Previous studies on group buying focus on the benefit buyers receive in reduced acquisition costs or enhanced bargaining power. In this paper, we show that buyers can instead get hurt from such cooperation. Specifically, we consider a two‐level distribution channel with a single manufacturer and two retailers who compete for end customers. We show that, under linear demand curves, group buying is always preferable for symmetric (i.e., identical) retailers. For asymmetric retailers (i.e., differing in market base and/or efficiency), group buying is beneficial to the smaller (or less efficient) player. However, it can be detrimental to the larger (or more efficient) one. Despite the lower wholesale price under group buying, the manufacturer can receive a higher revenue. Interestingly, group buying is more likely to form when retailers are competitive in different dimensions. These insights are shown to be robust under general nonlinear demand curves, except for constant elastic demand with low demand elasticity.