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To Groupon or Not to Groupon: The Profitability of Deep Discounts

Author

Listed:
  • Benjamin Edelman

    () (Harvard Business School, Negotiation, Organizations & Markets Unit)

  • Sonia Jaffe

    () (Department of Economics, Harvard University)

  • Scott Duke Kominers

    () (Becker Friedman Institute, University of Chicago)

Abstract

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.

Suggested Citation

  • 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.
  • Handle: RePEc:hbs:wpaper:11-063
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    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. On the wisdom of Groupon
      by Economic Logician in Economic Logic on 2011-02-03 21:31:00

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    Cited by:

    1. 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.
    2. O. Loginova & A. Mantovani, 2015. "Information and Online Reviews," Working Papers wp996, Dipartimento Scienze Economiche, Universita' di Bologna.
    3. repec:fan:mcmcmc:v:html10.3280/mc2017-002006 is not listed on IDEAS
    4. Oksana Loginova & Andrea Mantovani, 2015. "Price Competition in the Presence of a Web Aggregator," Working Papers 1616, Department of Economics, University of Missouri, revised 17 Aug 2016.
    5. Wu, Chien-Wei & Chiu, Hsien-Hung, 2016. "Price Discrimination Through Group Buying," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 57(1), pages 27-52, June.
    6. repec:eee:joreco:v:40:y:2018:i:c:p:299-303 is not listed on IDEAS
    7. Ming Hu & Mengze Shi & Jiahua Wu, 2013. "Simultaneous vs. Sequential Group-Buying Mechanisms," Management Science, INFORMS, vol. 59(12), pages 2805-2822, December.
    8. Francesca Magno & Fabiio Cassia & Marta Ugolini, 2014. "L’efficacia delle campagne di social couponing: uno studio tra i merchant di Groupon," MERCATI E COMPETITIVITÀ, FrancoAngeli Editore, vol. 2014(3), pages 41-63.
    9. 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.
    10. Jiahua Wu & Mengze Shi & Ming Hu, 2015. "Threshold Effects in Online Group Buying," Management Science, INFORMS, vol. 61(9), pages 2025-2040, September.
    11. repec:gam:jsusta:v:10:y:2018:i:3:p:579-:d:133311 is not listed on IDEAS
    12. repec:kap:compec:v:53:y:2019:i:2:d:10.1007_s10614-017-9736-y is not listed on IDEAS
    13. Laura Reinhart & Mary Kate Naatus, 2017. "Groupon, m-commerce and mobile apps: Perceptions of small business owners and consumers," Business & Entrepreneurship Journal, SCIENPRESS Ltd, vol. 6(1), pages 1-3.
    14. Amedeo Piolatto, 2015. "Online booking and information: competition and welfare consequences of review aggregators," Working Papers 2015/11, Institut d'Economia de Barcelona (IEB).

    More about this item

    Keywords

    voucher discounts; Groupon; experience goods; repeat purchase.;

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    1. Economic Logic blog

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