Group buying with consumer disappointment at failed deals

Abstract

In group buying (GB), the retailer launches a deal with a discounted product price and a minimum group size requirement. Strategic consumers then determine whether to sign up for the GB deal or purchase the product at the regular price immediately. If GB fails, disappointed GB participants perceive a negative psychological utility and decide whether or not to buy it again at the regular price. Considering the disappointment caused by a GB failure, in our basic model, we formulate a two-period game to study the retailer's optimal pricing decisions and consumers’ purchasing strategies. By deriving the likelihood function of a consumer signing up for the GB deal and utilizing rational expectations theory, we characterize how consumers form their own beliefs about the GB success rate. We find that consumer sentiment toward a failed GB deal serves an important role in a GB deal. Specifically, there exists a threshold of the disappointment factor where the retailer's profit and consumers’ purchase decisions may change, and consumer leakage and retention may occur. We prove the existence of the subgame perfect Nash equilibrium and outline how the retailer should design the GB schedule. Our study shows that if properly designed, GB is an effective strategy to enhance consumer interests and improve profit. Moreover, a big discount should be offered when the disappointment factor is significant. When the consumer sentiment toward a failed GB deal is insignificant, the retailer should launch a GB deal; otherwise, he should provide the regular sales channel only. We conduct numerical experiments to study the impacts of different factors in a GB deal. Our key results continue to hold in several extensions from our basic model: retailer competition, observable secured group size, and social interactions between consumers.