30, Bid Together, Buy Together

Notes taken from 'Bid Together, Buy Together: On the Efficacy of Group-Buying Business Models in Internet-based Selling' (2001), by Robert J. Kauffman and Bin Wang

"... Dynamic pricing approaches are used by many well known Internet-based firms, including firms that offer online auctions such as eBay and Amazon.com. A group-buying discount is a dynamic pricing mechanism that mimics the general approach of traditional "discount shopping clubs". Group buying pricing mechanisms permit buyers to aggregate their purchasing power and obtain lower prices than they otherwise would be able to get individually..."

1, Introduction

Model type: Group-buying models
Key concept: Enable buyers to obtain lower prices, as more people indicate a willingness to buy from the Internet-based seller's Web site. There are two variaties, involving group-buying with a fixed time period to completion of an auction, and group-buying with a fixed price that is achieved only when enough buyers participate.

... In a discussion on the recent closure of Mercata, Cook (2001) points out that the group-buying business model is too difficult for the general concumer to understand. The author also argues that the mechanics of group-buying on the Internet also prevent impulse buying, due to the lengthy periods consumers have to wait until until the end of the auction cycles that characterize group-buying market mechanisms. More importantly, he argues that the transaction volume on group-buying sites is much smaller than those of the traditional discount stores, which makes it difficult for group-buying sites to compete with retial giants such as Wal-Mart and Target...

2, The Basics of Group-Buying Models in E-Commerce

2.1, The Market Mechanisms

Pricing to match buyers and sellers is an important function of a market. In the bricks-and-mortar world, posted pricing mechanisms have been the dominant pricing strategies, where retailers display the prices they ask for the merchandise and consumers decide whether they would accept the prices or not. Under dynamic pricing mechanisms, however, buyers are no longer left with this take-it-or-leave-it decision. They can actively negotiate with the sellers to reach a satisfactory price...

2.2, The Value Proposition for Group-Buying on the Internet

The primary value proposition of group-buying business models to consumers is the lower prices they can provide, due to the buyers' collective bargaining power. By accumulating a large number of orders in a short period of time, group-buying Web sites claim they can negotiate low prices with manufacturers and suppliers, and then pass these savings on to their customers...

3, Buyer Behaviour and Market Competition in Group-Buying

(Buyer Behaviour Under the Group-Buying Market Microstructure; The Anticipation of a Price Drop; The Group-Buying Mentality; The Price Threshold Effect; Competition in the Group-Buying Market)

... The "Save-a-Spot" feature at Mobshop allowed shoppers to place conditional bids at lower prices if they were dissatisfied with the current price. The created a win-win situation for both the firm and its customers... Thus, customers did not incur the risk of buying at prices higher than they were willing to pay... And so we see that, under the group-buying market microstructure, consumers have the oppurtunity to collaborate with each other to get lower prices, instead of simply bidding against each other in auctions. Hence, consumers have the incentive to recruit other shoppers...

4, A Framework for Comparing Group-Buying Websites

Based on our survey of the group-buying websites, we identified two primary kinds of customer targeting strategies: business-to-customer (B2C) and business-to-business (B2B). The B2B category also includes the education and government procurement. We also distinguish whether a buyer or a seller initiates the auction cycle... Finally, we note that the demand aggregation approach can be determined by whether the Web site is a destination site or a site with a distributed-service model (e.g. embedded in other Web sites)...

(Mercata.com; Mobshop.com; LetsBuyIt.com; Other Group-Buying Websites)

5, Analyzing Group-Buying Business Models

Some Dimensions for Comparing Group-Buying Business Models:
- Industry Studies
- How Do Prices on Group-Buying Web Sites Compare With Other Firms' Prices?

Comparing Rivals: Mercata and Mobshop
- Pricing Strategy
- Information Endowment
- Site Features
- Product Emphasis
- Pre-Trade and Post-Trade Logistics

Discussion
(1) In which market does the group-buying model work best, B2C or B2B?
(2) How should firms that are focusing on the B2C market compete with other business models for limited customer resources?
(3) What do we learn about the composition of effective product offerings at group-buying Web sites?
(4) To what extent are group-buying Web sites at a disadvantage when it comes to the use of shopbots for comparison shopping?

6, Conclusion