To Groupon or not to Groupon: The profitability of deep discounts

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 whereby a discount voucher service can benefit affiliated firms: price discrimination and advertising. For vouchers to provide successful price discrimination, the valuations of consumers with 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 that are patient or relatively unknown, and for firms with low marginal costs. Extensions to our model accommodate the possibilities of firm price reoptimization and multiple voucher purchases. We find potential benefits of online discount vouchers to certain firms in certain circumstances, but vouchers are likely to increase firm profits under relatively narrow conditions.

Threshold Effects in Online Group Buying

“…Group buying can also be used as a mechanism for price discrimination and advertising (Edelman et al 2010). Jing and Xie (2011) examine the use of group-buying mechanism in facilitating social interactions.…”

Deal or No Deal? - Asessing the Daily Deal Shopper

“…Furthermore, customers display different coupon redemption behaviors online than offline, with many more coupons being redeemed online [12]. Research on daily deal platforms follows various approaches: the economics of daily deals [11,13], price comparisons [14], the effect of word of mouth on daily deal sites [13], the profitability of daily deal promotions for businesses [15,16], impulse buying in the context of daily deals [3], and the maximization of the consumer welfare function [17]. To our knowledge, no research exists on customer segments within daily deal platforms.…”

Information and Online Reviews

“…Although the total quantity is constant regardless of the presence of the aggregator, the society at large may benefit if the number of firms going online increases when discounts are allowed. Edelman et al (2014) examine the profitability and implications of online discount vouchers such as those used by Groupon. 10 Their paper is pertinent to ours as such a pricing strategy facilitates price discrimination.…”