Group-Buying: A New Mechanism for Selling through Social Interactions

Abstract

This paper examines a unique selling strategy, Group Buying, under which consumers enjoy a discounted group price if they are willing and able to achieve a required group size and coordinate their transaction time. We argue that Group Buying allows a seller to gain from facilitating consumer social interaction, i.e., using a group discount to motivate informed customers to work as “sales agents” to acquire lessinformed customers through interpersonal information/knowledge sharing. We formally model such an information-sharing effect and examine if and when Group Buying is more profitable than (1) traditional individual selling strategies, and (2) another popular social interaction scheme, Referral Rewards programs. We show that Group Buying dominates traditional individual selling strategies when the information/knowledge gap between expert and novice consumers is neither too high nor too low (e.g., for products in the mid-stage of their life cycle) and when inter-personal information sharing is very efficient (e.g., in cultures that emphasize trust and group conformity, or when implemented through existing online social networks). We also show that, unlike Referral Rewards programs, Group Buying requires information sharing before any transaction takes place, thereby increasing the scale of social interaction but also incurring a higher cost. As a result, Group Buying is optimal when interpersonal communication is very efficient, or when the product valuation of the less-informed consumer segment is high.

Keywords: Group-Buying, Word of Mouth, Interpersonal Information-Sharing, Referral Rewards Programs, Pricing, Social Interaction, Marketing, Internet, Groupon