“Consumer Equilibrium, Pricing, and Efficiency in Group Buying: Theory and Evidence” by Mr. Liu Ming
Mr. Liu Ming
PhD Candidate in Operations Management
Robert H. Smith School of Business
University of Maryland
Group buying events, in which the unit price for a good or service declines with higher number of customer sign ups, are increasingly becoming popular for retailing goods and services, especially in emerging markets. This paper theoretically and empirically studies consumer equilibrium, pricing, and efficiency of these events. Modeling a continuous time customer arrival and sign‐up process, we start by deriving the stochastic dynamic consumer equilibrium. Based on this equilibrium and utilizing sign‐up level data from a major Chinese retailer's group buying events, we then structurally estimate consumer arrival rates and utility distributions for 266 events. We demonstrate that consumers do not exhibit large‐scale systematic threshold waiting behavior, and that our model, which is based on forward‐looking consumer behavior instead, has strong predictive power for the dynamic evolution of the events as observed in the data. For very low and very high consumer arrival rates, the retailer sets a very small price discount, mimicking a single‐price sales event. However, for intermediate consumer arrival rate levels, she sets a deeper price discount to incentivize customers to recruit others to participate. Utilizing counterfactual analysis, we estimate that employing group buying increases customer demand by 14.2% and retailer profits by 9.2% on average, corresponding to an annual monetary gain of approximately $3.7M.