Group Buying, Buyer Heterogeneity and Seller’s Bargaining Power

Abstract

Group buying enables collective bargaining opportunity that individual buyers lack to negotiate prices with sellers. This potential negotiation capability has two opposing effects. On the one hand, the prospect of the group being able to negotiate price with its rival forces each seller to lower its price offer, as too high a price will induce the group to give its rival an opportunity to undercut its price via negotiation likely taking away all the buyers. On the other hand, the potential negotiation opportunity may also discourage sellers from competing aggressively in their price offers, as the benefit of charging a low price could be offset by competitors in negotiation, thus yielding overall higher prices for the buyers. In this study, we find that compared to individual purchase, buyers benefit from collective bargaining opportunity by group buying only if sellers’ bargaining power relative to the buyer group is low and/or buyers’ preferences towards the sellers are sufficiently differentiated. Given buyers’ strategic choice of group purchase, sellers may be worse off with a further increase in bargaining power, and so may social welfare.

Keywords: Group Buying, Buyer Heterogeneity, Bargaining Power, Game Theory

JEL Classification: C7, D6, D7, L1