Intertemporal Segmentation via Flexible-Duration Group Buying

Abstract

Problem definition : We study a special form of group buying: the group buying succeeds only if the number of sign-ups reaches a preset threshold, with no duration constraint. Customers with heterogeneous valuations arrive sequentially and decide between signing up for the group buying or purchasing a regular product. To decide whether to join the group buying, customers need to estimate their expected waiting time, which varies depending on the cumulative sign-ups by the time of their arrival. The firm decides on the prices for the group-buying product and regular product, with the product quality levels and group-buying size exogenously determined. Academic/practical relevance : This type of group buying is often adopted for a special edition of the product and offered alongside a constantly available regular product. Methodology : We study the product line design with the group-buying sign-up behavior of customers characterized by the rational expectations equilibrium in a random pledging process. Results : We show that group buying with flexible duration can result in intertemporal customer segmentation, as different segments might be admitted at different times in the dynamic sign-up process. Such intertemporal segmentation is a natural discrimination scheme and has nontrivial implications. First, the efficiency loss due to waiting for enough sign-ups may decrease when a larger batch size is required for economic production. Second, as valuation heterogeneity in the market increases, the firm may not always benefit from offering group buying along with the regular product. Third, group buying can achieve a win-win-win situation for both high-end and low-end customers as well as the firm. Managerial implications : In addition to demonstrating the profitability of flexible-duration group buying, we show that the firm can strengthen its profitability by contingently setting prices or concealing sign-up information in group buying. We also confirm the robustness of our main insights by considering customers’ heterogeneous patience levels and horizontally differentiated products, among other factors.