Group-buying : implications on retailers' operational and marketing decisions

Abstract

The emergence of group-buying phenomena, a.k.a. Tuangou in Chinese, under which consumers can utilize their aggregated demand by purchasing as a group to get discounts from the retailers, has achieved particular popularity especially in China. As group-buying becomes an inevitable trend, it has substantially altered the consumer purchasing behavior and brought new challenges to the retailing industry. The practical evidence indicates that retailers might take various stances as group-buying arises, whereas the potential consequences concerning reduced regular sales and shrunk profits push them to make adjustments on the operational and marketing strategies. Recently, there are growing studies about group-buying. However, most attention has been given to empirical investigations of group-buying consumer behavior or theoretical research of group-buying mechanism that outperforms other traditional selling formats. There is a lack of understanding as to whether group-buying would be a blessing or curse to the retailers and how they can accommodate this emerging demand with market changes. In light of this, our research aims to bridge the gap by exploring the strategic value of group-buying to the retailers and its implications on the retailers’ operational and marketing decisions.

Specifically, we explicate analytical models to carry out this research in two studies, aligning with the development of group-buying in practice. In study one, we investigate consumer-driven group-buying, whereby the group demand is initiated by consumers. We consider a setting of two retailers that sell substitute products in the market. With group-buying arising as a purchasing mode, the market splits into two segments, a regular segment and a group-buying segment. While regular consumers individually purchase at the regular prices, group-buying consumers can form a group and approach the retailers for bargains. Each retailer, when approached by group-buying consumers, has to make a decision on either accepting or turning down their group demand. We primarily analyze a sequential bargaining game between the group-buying consumers and the two retailers to address the effects of consumer behavior and the strategic interaction between the retailers on the price to accommodate the group consumers, the equilibrium formation, and the profit performance of retailers relatively to each other.

In study two, as group-buying evolves into a mature stage, retailers who face the market segmentation can determine to introduce a new group-buying channel to complement its regular sales which also serves as a substitute. Our primary goal is to examine the retailers’ motivations to open group-buying channels and the intricate role of market competition on the equilibrium channel structure. We can demonstrate that, retailers will forfeit the group-buying option and only sell through the regular channels when the capacity level is very low. If retailers have large enough capacity, both of them will be inclined to treat group-buying as one selling opportunity by always opening group-buying channels. It becomes tricky when retailers have a moderate capacity size. The equilibrium then critically depends on the sophisticated forces between substitution effects and consumer’s channel preference. Dramatically, a higher capacity level may not necessarily lead to the retailers’ adoption of group-buying channel. We further investigate the retailers’ strategic flexibility selection in pricing and make implications of their decision sequence under group-buying context.

This research contributes to the growing group-buying literature by examining the strategic implications of group-buying to the retailers in a competitive setting. The findings thus generated can offer preliminary guidance for the competing retailers to resolve group-buying problem, in association with their operational and marketing decisions. More importantly, it generates new insights to the management of group-buying business which will be of high significance to both practitioners and researchers.