Cooperation mechanism, product quality, and consumer segment in group buying

Abstract

We analyze the cooperation mechanism in a group buying channel where a supplier sells products to heterogeneous consumers through an organizer. We consider two cooperation mechanisms: traditional wholesale mechanism and commission negotiation mechanism. In particular, suppliers often need to negotiate the commission fee with organizers who promote products in group buying. The organizer faces two types of consumers who differ in their valuation of product quality (i.e., informed consumers and one less-informed consumers). We identify the conditions under which cooperation mechanism and consumer segment can lead to ”win-win” and ”win-lose” outcomes for the supplier and the organizer in group buying. We find that the supply chain incentives are often misaligned under the wholesale mechanism because the supplier extracts the entire profit from the organizer. However, the supplier and the organizer have perfect alignment of preferences when the operating cost is medium and the bargaining power is not so high. We also show that, when the product quality is endogenous, the commission negotiation mechanism can generate more consumer surplus. The theoretical and managerial insights derived from this work contribute to a deeper conceptual and practical comprehension of how suppliers make strategic decisions in group buying settings.