Marketing Letters

, Volume 27, Issue 1, pp 39–53 | Cite as

To Groupon or not to Groupon: The profitability of deep discounts

  • Benjamin Edelman
  • Sonia Jaffe
  • Scott Duke Kominers
Article

Abstract

We examine the profitability and implications of online discount vouchers, a relatively new marketing tool that offers consumers large discounts when they prepay for participating firms’ goods and services. Within a model of repeat experience good purchase, we examine two mechanisms whereby a discount voucher service can benefit affiliated firms: price discrimination and advertising. For vouchers to provide successful price discrimination, the valuations of consumers with access to vouchers must generally be lower than those of consumers who do not have access to vouchers. Offering vouchers tends to be more profitable for firms that are patient or relatively unknown, and for firms with low marginal costs. Extensions to our model accommodate the possibilities of firm price reoptimization and multiple voucher purchases. We find potential benefits of online discount vouchers to certain firms in certain circumstances, but vouchers are likely to increase firm profits under relatively narrow conditions.

Keywords

Voucher discounts Groupon Experience goods Repeat purchase 

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Copyright information

© Springer Science+Business Media New York 2014

Authors and Affiliations

  • Benjamin Edelman
    • 1
  • Sonia Jaffe
    • 2
  • Scott Duke Kominers
    • 3
  1. 1.Harvard Business SchoolCambridgeUSA
  2. 2.Department of EconomicsHarvard UniversityCambridgeUSA
  3. 3.Society of Fellows, Department of Economics, Program for Evolutionary Dynamics, and Center for Research on Computation and SocietyHarvard UniversityCambridgeUSA

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