Mark Lett (2014) 25:425434

DOI 10.1007/s11002-013-9262-1

A pricing model for group-buying auction based

on customers' waiting-time
Mahyar Sharif Vaghefi & Mahrad Sharif Vaghefi &
Neshat Beheshti

Published online: 3 October 2013

# Springer Science+Business Media New York 2013

Abstract Group-buying auction is a new business model in e-commerce. This

auction has its own characteristics that make it distinct from other types of auctions.
Customers' waiting time is an inherent attribute for group-buying auction. However,
this attribute is rarely considered in the previous pricing models. Therefore, finding
an appropriate pricing model for it seems to be of great importance. In this paper, with
the help of game-theory concepts and according to each customer's waiting time in
group-buying auction, a pricing model for a duopolistic market is proposed which
takes into account both customers' and sellers' satisfaction. The pricing model shows
that customers' awareness of Internet group-buying auction is so important and if it is
lower than a boundary value, then the group-buying seller could not compete in the
market. The model emphasizes on economies of scale as a significant factor in the
success of the auction. The model also stresses the importance of gaining customers
with lower product value in the group-buying auction.
Keywords Group-buying . Dynamic pricing . Auction . Duopolistic market . E-commerce

1 Introduction
Group buying is a kind of auction that has clear distinctions from the others
(Kauffman et al. 2010a; b). The main goal of the group-buying auction is to aggregate
demands from multiple buyers with similar needs. As a result, customers and small
companies with low bargaining power can use their collective buying power to
M. Sharif Vaghefi (*)
Sheldon B. Lubar School of Business, University of Wisconsin-Milwaukee, Milwaukee, WI, USA
e-mail: mahyar@uwm.edu
M. Sharif Vaghefi
School of Management and Economics, Sharif University, Tehran, Iran
N. Beheshti
Department of Engineering and Mathematical Science, University of Wisconsin-Milwaukee,
Milwaukee, WI, USA

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Mark Lett (2014) 25:425434

purchase products with lower prices. However, people who participate in this kind of
buying system are usually faced with uncertainty, waiting time, and risk issues, which
are rarely seen in other e-retailing systems. In the recent years, several works have
been done in this area to find the main characteristics of group-buying auction
(Kauffman et al. 2010a; b; Chen et al. 2009; Lai and Zhuang 2004; Kauffman and
Wang 2002).
Pricing is one of the four main aspects of marketing and it is also the most important
one (Nagle and Holden 2002). While pricing is a unique factor for companies to
generate income, other aspects of marketing are produce cost (Breidert 2006). One of
the first pricing models in the group-buying auction is related to Anand and Aron
(2003). They look for an optimal pricing strategy from the business perspective. They
assume that the demand functions are deterministic and consider a group-buying seller
who sells their products at the price P1 when the demand is under the specified amount,
and they sell them at P2, when otherwise. In the first step, they analyze the price strategy
when the demand functions are parallel. They conclude that in some situations, the
optimal price for P2 is equal to P1 and in some others, the price P2 is never realized in the
market. As a result, group-buying auction cannot excel the fix pricing system in
providing revenues for the seller. In the second step, they considered intersecting
demand regimes and found out that under optimal pricing strategy, group-buying
auction can surpass the fix pricing system. Anand and Aron (2003) demonstrate that
economies of scale is a vital part of the group-buying auction and they also conclude
that in this special kind of auction, pricing should always precede production. Chen et al.
(2007) have looked more comprehensively; they believe demand regimes are not
normally deterministic. Therefore, they consider randomness in the regime, and in the
absence of economies of scale, they prove that the group-buying mechanism can never
excel the fix pricing. However, by considering risk issues, they deduce that risk-seeking
sellers can take more advantages from the group-buying auctions.
The other work, which has somehow considered pricing in the group-buying
auction, pertains to Chen et al. (2010). They note two time periods, namely, bidding
and delivery times, in the auction. They assume that on the one hand, bidders come to
the auction one by one, and on the other hand, the seller can estimate the demand but
could not clearly determine it. As a result, the seller postpones the production to the
last time periods of the auction in which the bidding is almost over and the seller can
determine the demand accurately. They demonstrate that the seller can improve their
revenue by designing a good pricing curve.
Price fairness from customers' perspective in group-buying auction is another issue
considered by Lee et al. (2011). They demonstrate that customers would have a
higher tendency to accept the price discrimination if they feel that they can control the
price. Finally, Li et al. (2010) focus on bidders' waiting time in their pricing model.
Waiting time is an inherent characteristic of the group-buying auction and can be very
effective in customers' buying decision. Despite the existence of discounts in the
group-buying auction, the waiting time may cause customers to prefer the fix-pricing
system to the group-buying one. Therefore, Li et al. assume that all customers have a
same value for the selling product and this value decreases according to the waiting
time. According to this, they develop their pricing model in the monopolistic and
duopolistic market. However, they consider a constant waiting time for all the
participants in the auction, which is not the case in the real world most of the time.

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There have obviously been very few works in the group-buying pricing area, which
could not completely demonstrate various aspects of this new kind of auction. In the
current study, we focus on the pricing as a profit maximization tool and develop a
contribution margin analysis model for a duopolistic market, where two sellers with group
buying and fix pricing mechanism compete against each other. We also consider the
effects of some parameters in our pricing model rarely considered in previous studies. The
most important one is the existence of customers with different values in the market, which
can really affect on group-buying profitability and also its pricing strategy. Customers'
awareness and customers' perspective about the success of the group-buying auction are
the other parameters that can be effective on the pricing strategies and sellers' revenues.
The rest of this paper is organized as the following: In Section 2 we introduce a primary
model for the market, then in Section 3 we extend our primary. Finally, Section 4 is the
conclusion where the main finding of the model is interpreted.

2 The primary pricing model

In recent years, there have been several investigations done on online pricing systems
(Li and Tang 2011; Garbarino and Maxwell 2010; Kopalle et al. 2009; Dube et al. 2007;
Chun and Kim 2005; Ancarani 2002). However, very few works have been done on the
pricing models of group-buying auction. Group-buying websites are usually hosted by
third-party companies such as groupon.com in which various sellers put their products
for sale. Each product has its own auction time and customers can bid on the product for
that specific duration. Finally, when the auction time for a product is finished, the
product would not be available on the group buying web site for some time periods.
As a result, a customer could not count on a group buying web site as a permanent option
for buying his/her desired products. For developing our primary pricing model, we
consider a duopolistic market in which a group-buying seller (GS)a seller that sells his
product on a group-buying websiteand a fix-pricing seller (FS) competes against each
other. There are two prices (P1 and P2) to sell the product in the market. On the one hand,
the FS always sells his product at P1 and customers can purchase their desired product
from this seller directly and without any waiting time. On the other hand, the GS sells his
product only during the auction. The GS always defines a minimum quantity for the
number of buying requests at the beginning of the auction and if the number of buying
requests reaches that point during the auction then he would sell products at the P2 which
is lower than P1, otherwise he would sell them at the P1. As a result, customers who want
to buy from the GS should face the waiting time, which could vary for each customer
based on his entrance time in the auction. Continuous demand and customers' arrival
time with uniform distribution are also considered, so in each time unit, just one
customer enters the market and chooses his desired seller. Furthermore, while groupbuying auction is an Internet-based selling platform and also because the auction may
not be available in some time periods, customers who want to purchase products from
the GS should be aware about the existence of her desired product in the group-buying
website. For instance, consider a lady who wants to buy a cosmetic product. She always
has the option to buy the product from a FS; on the other hand, the same product is not
always available on the group-buying website. Therefore, group-buying website need to
use advertising methods such as sending daily emails to their customers to aware them

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about the existence of new products on their websites and this lady would buy this
product from GS only if her utility of buying from GS is greater than FS and she had
became aware that the product exist in the group-buying method. As a result, we
consider an awareness variable (m) in our model showing in percentile how many
customers are aware about the existence of the product in group-buying website which
can show the effects of advertising in the pricing and success of a GS.
There are also some other assumptions in group-buying systems that are common
in all group-buying researches (Chen et al. 2007, 2010; Kauffman and Wang 2002):
Assumption 1: Products are homogenous.
Assumption 2: Each bidder demands just one unit of the product offered in the market.
Assumption 3: There is no collusion between bidders.
Assumption 4: Bidders are risk neutral and customers' value for the product can
be stated in the terms of monetary.
Assumption 5: The interval between the customers' arrival to the market and his
buying time is omitted.
Assumption 6: A customer will buy from the group-buying seller when they are
indifferent about which seller they should buy from.
Assumption 7: The customers are rational individually.
Next, while the products are homogeneous, the only advantage for customers in buying
from the GS relates to the discount scheme. Finally, we assume that group-buying-selling
platform is a blinded one, which means that customers cannot view the number of bids that
are placed before their entrance and they just decide to purchase from the auction according
to the probability of auction success (q), this parameter can be deduced from previous
experiences that customers have from attending to various group-buying auctions and also
the reputation of group-buying website and the GS. In our model, we consider q as a
common probability in the market for all customers. Obviously, the number of customers in
group-buying auction would be increased with any growth in the success probability
parameter. All of the symbols that are used in the pricing model are listed in Table 1.
Table 1 The symbols of the pricing model
Symbol Description
P1

The common price in the market.

P2

The second price in group-buying auction.

The possibility for the price reduction in group-buying auction from the customers' perspective.

Monetary value of a time unit for the customers.

The time duration of a selling period in the market.

Tg

The time duration of the group-buying auction in a selling period.

cf

The common production cost in the market.

cg

The production cost in the group-buying auction in case that demand reaches the price reduction
point.

The percentage of the customers aware about existence of the group-buying auction.

A customer's entrance time in the market.

Tw

Waiting time in the auction for a customer. (Tg t)

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For developing pricing models we use Hotelling (Hotelling 1929) as a basis of our
models. In the primary model, we assume that all customers have the value of v1 for
the product which is more than P1+B.Tg for each customer. 1 According to the
entrance time and two options for selecting the sellers, customers face two different
utility functions, which are as follows:


u f v1 P1
1
ug v1 P1 B:T w q:P1  P2
Each customer computes his buying utilities at his entrance time then he selects the
seller that provides a better utility. The indifference entrance time - when both utilities
are equal - for the customers is t T g q:P1BP2 . Therefore, the customers who
enter the market after t^ but before the auction ending time (Tg) would prefer the GS
and otherwise they would choose the FS as it demonstrates in Fig. 1.
Moreover, with respect to Fig. 1, we can deduce some facts about the duopolistic
market. The first one is about the auction duration. Actually, the best auction duration
is q:P1BP2 because on the one hand, any time interval more than that could not bring
more customers for the GS and any time less than that could cause customer
reduction. On the other hand, q is always between 0 and 1 then the weakly dominant
strategy for the auction duration is P1 BP2 .
The second finding is about the sellers' demand. According to our assumptions about
the customers' entrance distribution and customers' awareness in the group-buying
auction, in each time unit, one customer enters the market. If the customer is aware
about the existence of his desired product in group-buying websites and the auction runs
on that time, he would choose the group-buying auction only when he has a dominant
utility through buying from the GS. In any other scenario, the customer would prefer the
FS to the GS. Based on the second fact the demand functions are as follows:



q:P1 P2
 B

q:P1 P2
D f T m:
B
Dg m:

According to these demand functions, finding appropriate prices in the duopolistic

market has become to a profit maximization problem, which the GS wants to
maximize his profit with the price P2 and the FS with the price P1. Therefore, the
optimal prices are derived as follows:
2cg c f
T :B

3m:q
3
2T :B 2c f cg

3m:q
3

P2 
P1 

1
The P1+ B.Tg amount is the maximum amount of P1+ B.Tw for all customers. Considering this boundary
amount, we can be assured of the purchasing of all the customers, even if the group-buying auction fails to
reach to the second price

Mark Lett (2014) 25:425434

Customers

430

t
Entrance Time

Fig 1 Customers' utility according to their entrance time

These optimal prices lead us to the following results:

(1) Any increase in customer awareness (m) or in price reduction probability in
group-buying auction from customers' perspective (q) will cause reduction in
the prices. This effect on P1 will be twice as equal as that on P2.
(2) Any increase in time value or in a selling period would increase both prices in
the market. Like the previous result, this effect would also be doubled on P1.
(3) Any increase in production costs (cg, cf) also causes an increase in the prices.
Although changes in any of those two production costs can effect on both prices,
the price in each method takes more effect from its own production cost.
Putting these optimal prices into the profit functions present us equations that show
there is a direct relationship between increasing of the sale duration (T) and increasing of
the profitability. Therefore, both sellers can benefit from increasing the sale duration;
however, this increase cannot be continued to infinity, because this would cause prices to
be higher than the customer's value. Based on our initial assumption (v1 B.Tg + P1), the
best selection for each round of sells duration in the market for both sellers would be
mq3v1 qC f C g C g 2C f
. Therefore, the prices would be as follows:
Bq2
v1 cg
cg
q2
2v1 q:cg
P1
q2

P2

With regard to these optimal prices, the comparison of the profit functions in these two
methods of selling demonstrates that fix-price selling can be profitable as four times as
the group-buying selling if the volume production cost (cg) and common production cost
(cf) are equal. Therefore, the economies of scale has a vital role in group-buying
profitability and the group-buying profit will be higher than the fix-price profit just if
2q:c f v1
the volume production cost (cg) comply with cg <
. This equation shows that
1q
group-buying auction could never be a dominant selling option for a seller in the situation
that common production cost is less than or equal to one third of customers' value.

3 The extended pricing model

As in many other pricing models in the group-buying area, we just consider a common
product value (v1) for all the customers in our primary model. However, price reduction

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in group-buying auction is an advantage for the GS and he could absorb customers who
have a value less than the common price in the market. Therefore, a second group of
customers with a value (v2) less than P1 but more than P2 is considered in the extended
pricing model. This group of customers just bid with the second price and they will buy
the product only if the price reduces in the group-buying auction. A variable (x) is also
added to represent the percentage of customers in each group in the market (x represents
the percentage of the first group and 1-x represents the second group).
The utility function for the second group of customers is as follows:
ul B:T w q:v2 P2

This group would decide to purchase the product only if they have a positive utility
according to their entrance time. As a result, the indifference entrance time for the
q:v2 p2
second group of customerswhen the utility is equal to zerois t T g B
and the customers who enter the market after t^ but before the auction ending time
(Tg) would prefer to purchase the product. Fig. 2 demonstrates this more accurately.
With respect to Fig. 2, the second group of customers would participate in
the auction for just a specified interval q:v2Bp2 and while this interval is
always less than P1 BP2 the appropriate time for the group-buying auction would
still be P1 BP2 .
If both groups of customers and their utility functions are considered, then the
demand for each seller would be equivalent to the following equations:




q:P1 P2
q:v2 P2
Dg m:x:
m:1x:
B
B

6
q:P1 P2
D f T :xm:x:
B
Hence, if the GS and the FS want to maximize their profit with P2 and P1,
respectively, then the optimal prices would be:


2 C g v2 v2 x
BT x C f m q x


P2
4x
mq4x 

7
2
B
T
x
C

v
v
x
C f m q x
g
2 2

P1
m q x4x
4x

Customers

The derivation of the profit functions with respect to T are always positive, thus,
like the primary model, increase of a selling period would be beneficial for both
u

t
Entrance Time

Fig 2 Second group of customers' utility according to their entrance time

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Mark Lett (2014) 25:425434

sellers. However, there are some restrictions in the way of this increasing and the
following initial assumptions should be satisfied:

v1 B:T w P1 0
v2 P2 0

By solving these inequalities the following results are concluded:





m:q1: 2v1 2v2 cg: qq:v2
m: v1 v2 q:c f q:v2

T
B:2qq:x 2
B




m:q: v2 c f
m:q 2v2 2cg
T

B
B:x

Therefore, if the right hands of the first and second inequality are considered as T1
and T2, respectively, then the appropriate time for the selling duration would be the
minimum of these amounts. Accordingly, if T1 is the minimum then the optimal
prices would be:


v2 v2 :x cg x: cg 2v1 v2 v1 :xv2 :x

P2
q:x2q2:2x
2x
2v1 2v2 q:cg q:v2
P 1 v2
2qq:x 2

10

And if T2 is the minimum then the optimal prices would be:

P 2 v2
v2 cg
P 1 v2
x

11

3.1 Discussion on possibility of the competition

The pricing model is developed based on the condition that the auction duration is
always less than or equal to the selling period (Tg T). This condition should always
be checked before the pricing model is used. While the dominant time duration for the
group-buying auction is P1 BP2 and the optimal prices are also functions of T, the
selling period should satisfy the following inequalities:


8
m:q: cg 2c f v2 c f :xv2 :x
x2
>
>
if m:q <
T
<
<
m:q:

x4

2x
x4


12
m:q:
c
2c

c
:x
v
:x
>
x2

g
f
2
f
2
>
:T >
if m:q >
m:q:x4 2x
x4
c

g
According to these inequalities, if m:q > x2
x4 and v2 < 1x c f then the main
condition is violated and two sellers could not effectively compete in the market, and
the competition would be like a Bertrand competition. Moreover, in a condition
where only the former inequality is true, the competition is possible but with low
probability. As a result, while the awareness in the market or the probability of price

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reduction from customer perspective is nearly one-third, the competition in the

market is almost impossible.2

4 Conclusion
Group-buying auction is a new business model in e-commerce. This kind of auction has
several unique characteristics that distinguish it from the other Internet auctions. In this
paper, the main focus is on the pricing in a duopolistic market, which a group-buying
seller and a fix-price one compete against each other. Customers' waiting time is an
inherent attribute in group-buying auction; therefore, it is considered as a key factor for
implementing the model. Two groups of customers who have different value for the
product are also considered in the market while in most of the works done in this field
just one value has been considered. This could enhance the credibility of our model
because gaining new customers with lower value is an important feature of groupbuying auction that is rarely taken into account. The model also shows that the groupbuying auction could have better performance if the percentage of the lower value
customers in the market is increased. The other prominent factor in the model is
customers' awareness. The model shows that awareness can play a vital role for the
group-buying seller and it demonstrates that if this factor diminishes to about one third,
then the seller could hardly compete in the market. Our pricing model also shows that
economies of scale can be instrumental in the success of the group-buying seller.
According to the model, not only the group-buying sellers can predict their demands
and define the price reduction point more accurately, they can also determine appropriate
auction duration.

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