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To Groupon or Not to Groupon: The Profitability of Deep Discounts

Marketing Letters, Forthcoming

24 Pages Posted: 18 Dec 2010 Last revised: 30 Jul 2014

Benjamin G. Edelman

Harvard University - HBS Negotiations, Organizations and Markets Unit

Sonia Jaffe

Becker Friedman Institute for Research in Economics at the University of Chicago

Scott Duke Kominers

Harvard University

Date Written: February 3, 2014

Abstract

We examine the profitability and implications of online discount vouchers, a relatively new marketing tool that offers consumers large discounts when they prepay for participating firms' goods and services. Within a model of repeat experience good purchase, we examine two mechanisms by which a discount voucher service can benefit affiliated firms: price discrimination and advertising. For vouchers to provide successful price discrimination, the valuations of consumers who have access to vouchers must generally be lower than those of consumers who do not have access to vouchers. Offering vouchers tends to be more profitable for firms which are patient or relatively unknown, and for firms with low marginal costs. Extensions to our model accommodate the possibilities of multiple voucher purchases and firm price re-optimization. Despite the potential benefits of online discount vouchers to certain firms in certain circumstances, our analysis reveals the narrow conditions in which vouchers are likely to increase firm profits.

Keywords: Voucher Discounts, Groupon, Experience Goods, Repeat Purchase.

Suggested Citation

Edelman, Benjamin G. and Jaffe, Sonia and Kominers, Scott Duke, To Groupon or Not to Groupon: The Profitability of Deep Discounts (February 3, 2014). Marketing Letters, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1727508 or http://dx.doi.org/10.2139/ssrn.1727508

Benjamin G. Edelman (Contact Author)

Harvard University - HBS Negotiations, Organizations and Markets Unit ( email )

Soldiers Field
Boston, MA 02163
United States

HOME PAGE: http://people.hbs.edu/bedelman

Sonia Jaffe

Becker Friedman Institute for Research in Economics at the University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

Scott Duke Kominers

Harvard University ( email )

Rock Center
Harvard Business School
Boston, MA 02163
United States

HOME PAGE: http://www.scottkom.com/

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