Comparison of the group-buying auction and the fixed pricing mechanism

Authors:
Jian Chen;Xilong Chen;Xiping Song
Affiliations:
Department of Management Science, School of Economics and Management, Tsinghua University, Beijing, 100084, China;Department of Management Science, School of Economics and Management, Tsinghua University, Beijing, 100084, China;Department of Systems Engineering and Engineering Management, The Chinese University of Hong Kong, Shatin, NT, Hong Kong, China
Venue:
Decision Support Systems
Year:
2007

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Abstract

With the development of electronic commerce, online auction plays an important role in the electronic market. This paper analyzes the seller's pricing strategy with the group-buying auction (GBA), a popular form of online auction, which is designed to aggregate the power of buyers to gain volume discounts. Based on the bidders' stochastic arrival process and optimal strategy with independent private value model, this paper analyzes the sellers' optimal price curve of the GBA in the uniform unit cost case and in some supply chain coordination contracts. We find that the best discount rate is zero, which implies the optimal GBA is equivalent to the optimal fixed pricing mechanism (FPM). Then we compare the GBA with the FPM-in two special cases, the economies of scale and risk-seeking seller, and find that (1) when economies of scale are considered, the GBA outperforms the FPM; (2) when the seller is risk-seeking, the GBA also outperforms the FPM.