To Groupon or Not to Groupon: The Profitability of Deep Discounts
We examine the profitability and implications of online discount vouchers, a relatively new marketing tool that offers consumers large discounts when they prepay for participating firms' goods and services. Within a model of repeat experience good purchase, we examine two mechanisms by which a discount voucher service can benefit affiliated firms: price discrimination and advertising. For vouchers to provide successful price discrimination, the valuations of consumers who have access to vouchers must generally be lower than those of consumers who do not have access to vouchers. Offering vouchers tends to be more profitable for firms which are patient or relatively unknown, and for firms with low marginal costs. Extensions to our model accommodate the possibilities of multiple voucher purchases and firm price re-optimization. Despite the potential benefits of online discount vouchers to certain firms in certain circumstances, our analysis reveals the narrow conditions in which vouchers are likely to increase firm profits.
|Date of creation:||Dec 2010|
|Date of revision:||Jan 2014|
|Contact details of provider:|| Postal: Soldiers Field, Boston, Massachusetts 02163|
Web page: http://www.hbs.edu/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kyle Bagwell & Michael Riordan, 1988.
"High and Declining Prices Signal Product Quality,"
808, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Paul R. Milgrom & John Roberts, 1984.
"Price and Advertising Signals of Product Quality,"
Cowles Foundation Discussion Papers
709, Cowles Foundation for Research in Economics, Yale University.
- Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 729-754, July/Aug..
- Xiaoqing Jing & Jinhong Xie, 2011. "Group Buying: A New Mechanism for Selling Through Social Interactions," Management Science, INFORMS, vol. 57(8), pages 1354-1372, August.
- Che, Y.K., 1995.
"Buyer Alliances and Managed Competition,"
9527, Wisconsin Madison - Social Systems.
- Rahul Deb & Maher Said, 2013.
"Dynamic Screening with Limited Commitment,"
tecipa-485, University of Toronto, Department of Economics.
- Mark Bils, 1989. "Pricing in a Customer Market," The Quarterly Journal of Economics, Oxford University Press, vol. 104(4), pages 699-718.
- Jacques Cremer, 1984. "On the Economics of Repeat Buying," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 396-403, Autumn.
- Chakravarthi Narasimhan, 1984. "A Price Discrimination Theory of Coupons," Marketing Science, INFORMS, vol. 3(2), pages 128-147.
- Joel Sobel, 1984. "The Timing of Sales," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 353-368.
- Benjamin Edelman & Sonia Jaffe & Scott Duke Kominers, 2010.
"To Groupon or Not to Groupon: The Profitability of Deep Discounts,"
Harvard Business School Working Papers
11-063, Harvard Business School, revised Jan 2014.
- Benjamin Edelman & Sonia Jaffe & Scott Duke Kominers, 2016. "To Groupon or not to Groupon: The profitability of deep discounts," Marketing Letters, Springer, vol. 27(1), pages 39-53, March.
- Eric J. Friedman* & Paul Resnick, 2001. "The Social Cost of Cheap Pseudonyms," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 10(2), pages 173-199, 06.
- Steven Salop & Joseph Stiglitz, 1977. "Bargains and Ripoffs: A Model of Monopolistically Competitive Price Dispersion," Review of Economic Studies, Oxford University Press, vol. 44(3), pages 493-510.
- Krishnan S. Anand & Ravi Aron, 2003. "Group Buying on the Web: A Comparison of Price-Discovery Mechanisms," Management Science, INFORMS, vol. 49(11), pages 1546-1562, November.
- Liang, Xiaoying & Ma, Lijun & Xie, Lei & Yan, Houmin, 2014. "The informational aspect of the group-buying mechanism," European Journal of Operational Research, Elsevier, vol. 234(1), pages 331-340.
- Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-59, September.
- Carl Shapiro, 1983. "Optimal Pricing of Experience Goods," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 497-507, Autumn.
- Steven C. Salop & Joseph E. Stiglitz, 1977. "Bargains and ripoffs: a model of monopolistically competitive price dispersion," Special Studies Papers 94, Board of Governors of the Federal Reserve System (U.S.).
- Nelson, Phillip, 1970. "Information and Consumer Behavior," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 311-329, March-Apr.
When requesting a correction, please mention this item's handle: RePEc:hbs:wpaper:11-063. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Soebagio Notosoehardjo)
If references are entirely missing, you can add them using this form.