Use prices as sales agents

Abstract

We use a monopoly model with consumer heterogeneity to study the profitability of group buying, in which the discounted price is offered to consumers if more than a certain number of them agree to make purchases. We find that group buying generally outperforms intertemporal pricing but is outperformed by a referral reward program. The optimal minimum requirement depends on parameters. If a consumer and her invitee have homogeneous preference and there is no discount of future utility, a pricing strategy characterized by the low (medium) minimum requirement is always dominated by high minimum requirement, whose profit coincides with one‐person group buying.