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

Management Science, Forthcoming

47 Pages Posted: 20 Nov 2007 Last revised: 15 Aug 2011

Xiaoqing Jing

Georgia Institute of Technology

Jinhong Xie

University of Florida - Warrington College of Business Administration

Date Written: March 4, 2011

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

Suggested Citation

Jing, Xiaoqing and Xie, Jinhong, Group-Buying: A New Mechanism for Selling through Social Interactions (March 4, 2011). Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1030824

Xiaoqing Jing (Contact Author)

Georgia Institute of Technology ( email )

800 West Peachtree Street
Atlanta, GA 30308
United States

Jinhong Xie

University of Florida - Warrington College of Business Administration ( email )

209 Bryan Hall Campus Box 117155
Gainesville, FL 32611-7166
United States
352-392-0161 Ext. 1233 (Phone)
352-846-0457 (Fax)

HOME PAGE: http://bear.cba.ufl.edu/xie/Xie_DirectoryProfile.htm

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