Group Buying Commitment and Sellers’ Competitive Advantages

Abstract

This paper examines a model of duopoly firms selling to an exogenously formed buyer group consisting of members with heterogeneous preferences. Two research questions are addressed: (1) when is it optimal for a buyer group to commit to exclusive purchase from a single seller, and (2) how does the presence of group buying and the exclusive purchase commitment associated with it affect firms’ incentives to invest in quality improvement? We find that, even though exclusive purchase commitment benefits buyers when the competing products provide similar quality, it may lower buyer surplus if one product is significantly advantaged and/or the competing products are not highly differentiated horizontally. This result is robust even if the buyer group is formed endogenously. In addition, contingent on the similarity between the competing sellers’ investment costs, the sellers’ incentives to improve quality may be positively or negatively affected by the presence of group buying.

Keywords: Group Buying, Competitive Advantages, Quality Improvement

JEL Classification: C7, D4, D6, D7, I11, L1