Joint quality and pricing decisions for service online group-buying strategy

- We examine the role of quality in a service seller's group-buying strategy.
- We compare offline strategy and group-buying strategy.
- We show that service quality should be enhanced if adopting group buying strategy.
- The website scale and trading commission are major issues in group-buying strategy.

In this paper, we study the popular group-buying model in which a seller offers a discount on group-buying websites to attract new customers coming to experience his/her service. We analyze the conditions under which a seller could benefit from the group-buying strategy, in addition to discussing the optimal decisions concerning service quality and online price. We find that only when the website scale is sufficiently large will the seller benefit from adopting the group-buying strategy. We also consider the customers' substitution effect, that is, the existing offline customers turn to an online channel when the seller offers a discount on the group-buying website. When the website scale is relatively small and the substitution rate is high, the seller cannot benefit from group-buying. The seller should set a service quality higher than the base service quality when he/she cooperates with large group-buying websites. Moreover, compared to purely offline businesses, the seller will set a higher quality level if adopting a group-buying strategy.