RECA Distinguished Guest Lecture Series

Title: Group-Buying On The Web: A Comparison Of Price Discovery Mechanisms

Speaker: Krishnan S. Anand, PhD, The Wharton School, University of Pennsylvania

Date: May 16, 2003, 12:00-1:00pm

Location: DIMACS Center, CoRE Bldg. Room 301, Rutgers University, Busch Campus, Piscataway, NJ


Web-based Group-Buying mechanisms are being widely used for both Business-to-Business (B2B) and Business-to-Consumer (B2C) transactions. In this paper, we survey currently operational online Group-Buying markets, and then study this phenomenon using analytical models. We surveyed over fifty active Group-Buying sites, and provide a comprehensive review of Group-Buying practices in the B2B, B2C and non-profit sectors, across three continents.

On the modeling side, we build on the coordination literature in Information Economics as well as the quantity-discounts literature to develop an analytical model of a monopolist who uses web-based Group-Buying mechanisms under different kinds of demand uncertainty. We derive the monopolist's optimal Group-Buying schedule, and compare his profits with those that obtain under the more conventional posted-price mechanism. We also study the effect of heterogeneity in the demand regimes, in combination with uncertainty, on the relative performance of the two mechanisms. We further study the impact of production postponement (vis--vis production precommitment) by endogenizing the timing of the pricing and production decisions, in a two-stage game between the monopolist and buyers. Finally, we investigate how Group-Buying schemes compare with posted price markets when buyers can revise their prior valuation of products based on information received from third parties (infomediaries).

In all cases, we characterize the conditions under which one mechanism outperforms the other, and those under which the posted price and Group-Buy mechanisms lead to identical seller revenues. Our results have implications for firms' choice of price discovery mechanisms in electronic markets, and for the scheduling of production and pricing decisions in the presence (and absence) of scale economies of production. (Joint work with Ravi Aron)

Sponsored by Rutgers Graduate Student Association (GSA) and DIMACS.

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