The Implications of Group-Buying as a Channel Option Under Capacity Constraint

Abstract

We investigate a setting in which two retailers sell substitutable products to a market. With the rise of group-buying (GB) consumers, each retailer has the option to open a GB channel to cater to their demand and complement its regular sales. We find that the retailers will forfeit this option to only sell in regular channels when they have scarce capacities, but both open GB channels when they have ample capacities. The situation is more intricate when their capacity levels are intermediate, in which case the equilibrium channel structure is influenced by the substitution effect and the consumers’ channel preference. A higher capacity level does not necessarily incentivize a retailer to open group-buying channel. When given the authority, the retailers under strong competition pressure prefer to commit to regular prices over tailoring regular prices to fit the channel structure. Circumstances exist in which both retailers strategically open GB channels but keep them inactive by inducing all consumers to only buy from regular channels. Moreover, the sequence whereby the retailers follow to set regular prices and decide on GB channels is inconsequential on market equilibrium. Our main findings are robust with respect to model assumptions.