Proceedings of the Fourth Workshop on Knowledge Economy and Electronic Commerce

Comparing the Performance of Group-Buying Models

- Time Based vs. Quantity Based Extra Incentives
Hsiangchu Lai
Department of Information Management
National Sun Yat-sen University
hclai@mail.nsysu.edu.tw

Ya-Ting Zhuang
Department of Information Management
National Sun Yat-sen University
m9142607@student.nsysu.edu.tw

Abstract
The purpose of this study was to explore the effects of extra incentives upon the performance of
group buying models. The extra incentive is designed to take advantage of the positive
participation externality effect proposed by Kauffman and Wang (2001). Two extra incentive
mechanisms are proposed for inducing buyers to join group buying earlier or to buy more: time
base, and quantity based. An experiment was implemented to quantify the performance of the two
proposed group-buying models with different extra incentive mechanisms, and to compare them
with that of the traditional group-buying model without any extra incentive mechanism. The
experimental results showed that the time-based model can reduce customers decision times
before joining the group buying while the quantity-based model causes customer to buy more
than originally planned in order to improve the discount.
Keywords: Group buying, Electronic marketing, Collective bargaining, Participation externality
effect

1. Introduction
In recent years, many innovative and interesting business models are emerging as the advent of
electronic commerce. One of them is online group-buying model. Actually, group buying is
nothing surprising in traditional business world. The essence of group-buying is based on the
bargaining power of group, i.e., the more people join, the lower price it will be. The speciality of
the Internet access without time and place limitation make group-buying model has more
potential. The getting popularity of the group-buying models is indicated by the increasing
number of group-buying websites, such as McNopoly.com, Online Choice, LetsBuyIt.com.
However, as in the traditional posted pricing model, buyers will not buy if the price is not
acceptable. Therefore, the advantages of the model cannot be realized if there are many
customers waiting for a lower price who have not yet decided to purchase.
Kauffman and Wang (2001) proposed the concept of a positive participation externality effect,
and found the expected price-drop effect. The positive participation externality effect indicates
that the number of existing orders has a significant and positive effect on the number of new
orders placed thereafter. The expected price-drop effect means that when the total amount of
existing orders is approaching the level that will invoke the next (lower) price tier, the number of
new orders will increase more quickly in this period. On the other hand, if the price is not

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reducing, fewer new orders will be placed.

Therefore, determining how to rapidly increase the total orders is an important strategy to
encouraging more new orders. The purpose of this research was to determine if better
performance would be obtained by using group-buying models with extra incentive mechanisms
in addition to the regular volume discounts to encourage buyers to join the group buying to take
the advantage of the positive participation externality effect. There are two extra incentive
mechanisms proposed for inducing buyers to join group buying earlier or to buy more: time base,
and quantity based. We then compare the performance of these two group-buying models with
the traditional group-buying model that has no extra incentive mechanism. Section 2 reviews
some related literature, and the two new group-buying models with different extra incentive
mechanisms are proposed in Section 3. The research framework and the experimental design are
described in Section 4, and Section 5 presents the experimental results and analyses. Finally,
conclusions are drawn in Section 6.

2. Positive Participation Externality Effect in Group Buying

The strategy of group buying is to combine many small orders in order to increase the bargaining
power so as to obtain a lower price. However, if the buyers do not know the final price, they
may be unwilling to join a buying group. This may result in the existing orders remaining
constant even when there are many buyers interested purchasing, and hence the advantage of
group buying cannot be realized because the price will not go down due to the low number of
new orders. Yamamoto and Sycara (2001) proposed a stable and efficient scheme for forming a
buyer coalition in an e-marketplace by calculating the surplus of buyers and sharing the surplus
among the buyers. However, this scheme is not easy to implement because buyers within a
single group-buying transaction pay different amounts.
Lai (2002) proposed another group-buying model, in which the buyer is allowed to join the
group-buying model with a conditional offer. That is, unless the final price is lower than the
buyers reserve price, the buyer does not have to accept the final price. Lai and Chen (2004),
using an experiment, compared the performance between the traditional group-buying model and
the one allowing buyer to join the group buying with a conditional offer. It revealed that the one
allowing buyer to join the group buying with a conditional offer has better performance in terms
of both the total orders and buyers satisfaction. Therefore, allowing buyers to join group buying
with a conditional offer is one way of encouraging consumers to place orders. However, the
order has little chance of being realized if the consumers reserve price is too low.
Kauffman and Wang (2001) explored the arrival of new buyers in the case of group-buying
discounts on the Internet. They found that the number of existing orders has a significant
positive effect on new orders placed during the following time period, which indicates the
presence of a positive participation externality effect. They also found the expected price-drop
effect: when the number of orders approaches the quantity required for the next (lower) price tier,
more new orders will be placed. All these findings imply that if more orders can be placed in an
earlier period, this may induce more new orders thereafter. Therefore, how to take the advantage
of the positive participation externality effect is an important strategy for inducing more new
orders in group-buying models.

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3. Incentive Mechanisms for Inducing a Higher Participation Externality Effect in

Group Buying
Two new group-buying models are proposed here based on the above description and the
purpose of this research. The first one is a time-based mechanism that operates in addition to
regular volume discounts, whereby the earlier the buyer joins the group buying, the more extra
discounts he/she receives. The second model is a quantity-based mechanism, in which the more
the buyer buys, the more extra discounts he/she receives. The former incentive mechanism is
designed to encourage buyers to join the group buying as early as possible, while the latter is
designed to encourage the buyers to buy more. It is expected that both will help to increase the
size of total orders and, therefore, to achieve the positive participation externality effect.

4. Research Framework and Experimental Design

The purpose of this research was to determine based on the concept of the positive
participation externality effect if group-buying models with incentive mechanisms to
encourage buyers to join the group buying earlier or to buy more result in a better performance.
The research framework is presented in Figure 1. The independent variable is the group-buying
model, of which there are three in this research: the two new group-buying models with extra
incentive mechanisms proposed in Section 3, and the traditional group-buying model that has
only regular volume discounts. Decision time, order size, and price are the three dependent
variables used to measure the performance of the different group-buying models.
The number of days required to make a decision about whether or not to join the group buying
and the login frequency before making the decision are the two measurements of decision time.
The login frequency indicates the number of times of logging into the system to check the
updated transaction status before the buyer decides whether or not to join the group buying. It
may imply the decision efforts of the buyer. The order size can be measured by the size of the
buyers final order and the discrepancy between the final order size and the planned order size of
the buyer. The price can be measured by the buyers perceived value and the discrepancy
between the forecasted final price and the actual final price.

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Decision Time
Days required to make
decision
Login frequencies

Group-buying models

Order Size

Traditional
Time based
Quantity based

Size of final order

Difference b/w final order

and planned order

Price
Perceived value
The difference b/w
forecasted final price and
final price

Fig. 1: Research framework

Table 1 indicates the distribution of the 135 valid samples. The subjects of this experiment were
part-time graduate students and purchasing employees in companies, all of which were assigned
randomly to the four group-buying models.
Table 1: Summary of valid samples
Buyers joining or not
joining group
buying

Join

Not join

Total

Traditional

40

45

Time based

39

44

Quantity based

43

46

Total

122

13

135

Group-buying model

The experiment attempted to simulate the practices of a normal business as closely as possible.
Each subject plays the role of being in charge of computer purchasing in a company, and is
provided with a scenario for a companys requirement to purchase a computer. The experiment
lasts for ten days, during which the system keeps all subjects continuously informed about the
progress of the group-buying transaction and reminds them that they do not have to make a
decision to buy unless they find a good price. The purpose of these reminders is to avoid the
subjects making a decision at the first login and then never coming back, which would not be the
case in practice.
Table 2 shows the regular price schedule which is the same for every model, but different extra
discounts are provided for different models (Table 3). Every subject is assigned randomly to one
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of the three group-buying models. In the experiment, each subject has to complete three
questionnaires: the first one before the experiment starts, the second at the moment after making
decision about whether or not to join, and the last after the entire experiment is finished; i.e.,
when the final result (total order size and final price) is available. In order to encourage all
subjects to participate throughout the whole experiment, money coupons are provided for a
lottery after they have completed the last questionnaire.
Table 2: Regular price schedule for every group-buying model
Size of total orders

Unit price

150

6,000

51100

5,800

101200

5,400

201400

5,200

>400

5,000

Table 3: Extra discounts provided by different group-buying models

Model

Extra discounts in addition to the regular volume discounts

Traditional

None

Time based

If the buyer joins the group buying from April 13 to 15, a 10% extra discount will
apply.
If the buyer joins the group buying from April 16 to 17, a 5% extra discount will
apply.

Quantity based

Buyer purchasing more than 12 computers will receive a 5% extra discount.

Buyers purchasing more than 20 computers will receive a 10% extra discount.

5. Data Analysis and Discussion

5.1 Basic statistical summary
The basic transaction results of the experiment are listed in Table 4. All models reached the
lowest price of the regular price schedule, NT5000. The quantity-based model has the largest
total orders (595). Table 5 reveals that more buyers placed larger orders in the quantity-based
model than in the other models. There are 24 orders buying more than 11 computers and 14 of
these orders buy more than 19 computers in the quantity-based model. All these preliminary data
imply that the quantity-based model reached its goal of encouraging buyers to purchase more in
order to get the extra discounts.
Table 4: The basic transaction result of the experiment
Model

Buyers joining the Buyers not joining the Size of total

Final price
group buying
group buying
orders

Traditional

40

467

5000

Time based

39

411

5000

Quantity based

43

595

5000

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Table 5: The summary of order sizes of individuals

Model

<12 orders 1219 orders

20 orders Total buyers Average order size

Traditional

30

40

10.27

Time based

31

39

9.07

Quantity based

19

10

14

43

12.89

Furthermore, Table 6 indicates, for the time-based model, most buyers join the group buying in
the first 4 days, which corresponds to the period during which extra discounts are received. On
the other hand, the average decision time of the quantity-based model is longest because the
extra discount is based on the ordered quantity rather than on the time of joining. It is therefore
obvious that the conditions for obtaining extra discounts have been invoked and have an effect
on the buyer behavior.
Table 6: The summary of the buyers joining time
Traditional

Day

Time based

Buyers joining Accumulated number Buyers joining

of buyers
on this day
on this day

Quantity based

Accumulated number Buyers joining Accumulated number

of buyers
on this day
of buyers

13

13

10

10

16

18

21

25

16

22

28

17

22

28

24

610

18

40

11

39

19

43

Average
decision time

2.96 days

1.59 days

3.35 days

5.2 Testing of hypotheses

Decision time
Hypothesis H1a: The buyers login frequencies before making a decision will differ
significantly between the group-buying models.
We found that most buyers log into the system frequently to learn the progress of the groupbuying transaction, and then decide whether or not to join at that particular time. The ANOVAs
in Table 7 reveal that there is no significant difference in the login frequencies between the
group-buying models. This might reflect that how frequently a buyer logs into the system to

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check the updated group-buying transaction status before making the decision depends mainly on
how anxious the buyer is about the progress of the group-buying transaction rather than on the
different extra discounts that are available. For example, a buyer in the traditional model might
be very anxious to log into the system very often to know if the volume has reached to his/her
expected price.
Table 7: ANOVA result number of days and login frequencies before making the decision to
join the group buying
Between groups
Login
frequency

Sum of squares
4.405

Mean square
2.202
7.711

Within groups

1017.788

132

Total

1022.193

134

75.951

37.976

Within groups

1336.982

132

10.129

Total

1412.933

134

Between groups
Number of
days

df

F
.286

P
.752

3.749

.026**

** Significant at the 0.05 level.

Hypothesis H1b: The decision times of buyers will differ significantly between the groupbuying models.
The decision time is the period from the buyers login to the day he/she decides to join the group
buying. The analyses of variance (ANOVAs) in Table 7 indicate that the decision time varies
significantly between the models. Table 6 indicates that the average decision times are 2.96, 1.59,
and 3.35 days for the traditional, time-, and quantity-based models, respectively. These results
indicate that the extra discounts in the time-based models have encouraged the buyers to join the
group buying earlier.
Order size
Hypothesis H2a: The buyers final order size differs significantly between the group-buying
models.
Regarding the individual buyers order size, the ANOVA results in Table 8 indicate that there is
significant difference between the three group-buying models.
Table 8: ANOVA result order size
Mean
Sum of
df
square
squares
345.830
2 172.915

Between groups
Final order size

Discrepancy between the

planned order size and the
final order size

Within groups

8084.052

132

Total

8429.881

134

Between groups

659.644

Within groups

8412.756

132

Total

9072.400

134

200

2.823

.063*

5.175

.007**

61.243

2 329.822
63.733

Proceedings of the Fourth Workshop on Knowledge Economy and Electronic Commerce

* Significant at the 0.1 level ** Significant at the 0.05 level

Hypothesis H2b: The discrepancy between the planned order size and the final order size
differs significantly between the group-buying models.
The planned order size is the amount originally planned by the subject acting as a buyer for a
company, and we want to determine if the group-buying models change this. Table 8 indicates
that the discrepancy between the planned order size and the final order size differs significantly
between the group-buying models. Furthermore, the detailed analysis of paired comparisons in
Table 9 reveals that the discrepancy between the planned and final order sizes is significantly
larger in the quantity-based model than in the traditional and time-based models. These results
demonstrate that the quantity-based model can encourage buyers to buy more significantly, even
changing the buyers original plans.
Table 9: Scheffe test for the discrepancy between the planned order size and the final order size
Discrepancy between the
Traditional Time based
planned and final order sizes
95%
Traditional
3.43~4.95
confidence
4.95~3.43
interval Time based
about the Quantity based
0.10~8.39** 0.83~9.17**
mean
** Significant at the 0.05 level

201

Quantity based
8.39~0.10**
9.17~0.83**

Proceedings of the Fourth Workshop on Knowledge Economy and Electronic Commerce

Price
Hypothesis H3a: The discrepancy between the forecasted final price and the actual final
price differ significantly between the group-buying models.
Since all models reached the lowest price of the price schedule, it is impossible to have a
forecasted final price lower than the lowest price of the regular price schedule. Therefore, we
divide the forecasted final price into two groups: (1) one in which the forecasted final price is
higher than the actual final price, and (2) the other in which the forecasted final price is equal to
the actual final price. The chi-square test results in Table 10 indicate that the discrepancy
between the forecasted final price and the actual final price differs significantly between the
group-buying models. Furthermore, the chi-square data in Table 11 indicate that the quantitybased model has the highest rate of buyers whose forecasted final price is equal to the actual
final price. It might result from that the quantity-based model has reached the lowest price more
quickly, and that the quantity-based model has the lowest percentage of buyers who join the
group buying in the first 5 days. This means that the decision is made by many of the buyers in
the quantity-based model close to the end of the experiment. Therefore, they may be exhibiting
better forecasting.
Table 10: Chi-square test for the discrepancy between the forecasted final price and the actual
final price
Valid
4.064

Pearson

df
2

Asymp. P (two tailed)

.131

Probability

4.073

.130

Linear relation

3.711

.054

** Significant at the 0.05 level

Table 11: Chi-square table for the discrepancy between the forecasted final price and the actual
final price
Model
Number
Traditional

Quantity based

Total
45

Percentage
within group

40.0%

60.0%

100.0%

Percentage of
total

13.3%

20%

33.3%

26

44

Count
Time based

Forecasted final price

Equal to the actual Higher than the
final price
actual final price
18
27

18

Percentage
within group

40.9%

50.1%

100.0%

Percentage of
total

13.3%

19.3%

32.6%

27

19

46

58.7%

41.3%

100.0%

Count
Percentage
within group

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Percentage of
total

20%

14.1%

34.1%

63

72

135

Percentage
within group

46.7%

53.3%

100.0%

Percentage of
total

46.7%

53.3%

100.0%

Count
Total

Hypothesis H3b: The buyers perceived value differs significantly between the models.
Table 12 indicates that the buyers perceived value differs significantly between the models,
implying that buyers interpret the extra discounts differently.
Table 12: ANOVA result perceived value in different group-buying models
Sum of squares
4.372
Between groups
Perceived
107.744
Within groups
value
112.115
Total

df

Mean square
2
2.186

132

F
2.678

P
.072*

.816

134

* Significant at the 0.1 level

6. Conclusions
The present study compared two incentive mechanisms with the traditional group-buying model,
and found that the performance of these mechanisms varies. It is significant that these incentive
mechanisms performed roughly as expected: the time-based model encourages the buyers to join
the group buying earlier, while the quantity-based model resulted in the largest order size.
However, the different product categories are not considered in this study. In addition, a
disadvantage of group buying is the uncertainty of price and time cost. Neither of these two
issues is included in this study. The next step is to explore how the extra discounts should be
scheduled in different situations, and to elucidate the best match between the different incentive
mechanisms and specific group-buying contexts.
Acknowledgements: This research was supported by the MOE Program for Promoting
Academic Excellent of Universities under the grant number 91-H-FA08-1-4 and the National
Science Council under the grant number NSC91-2416-H-110-018.
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