Potentially self-defeating: Group buying in a two-tier supply chain

Abstract

Retailers have an incentive to cooperate in the form of group buying (GB) when a supplier provides quantity discounts, because wholesale price under GB depends on total purchasing quantity rather than individual purchasing (IP) quantity. Most previous studies on GB focus on the benefits that buyers get but ignore the supplier׳s response to GB. In this paper, we take the supplier׳s response into consideration, and present a game model with a single supplier and two symmetric competing retailers in two systems: the retailers purchase individually, and the retailers group buy. Under a general quantity discount schedule, each system has a unique sub-game perfect equilibrium. The comparison between IP and GB suggests that GB may sabotage the benefits of all members in the supply chain (i.e., the supplier, the retailers, and the consumer). Retailers may hold contradictory attitudes toward GB before and after the publishing of the discount schedule. These insights are shown to be robust for the case when more than two retailers are involved, as well as the case when the supplier enjoys economies of scale based on the order volume. We suggest that a mixed discount schedule may help prevent the potential damage of GB. In addition, with significant economies of scale, the supplier and retailers may be better off under GB. Then GB can be a favorable purchasing strategy.