Pricing of excess inventory on Groupon

Abstract

We consider the problem faced by a business that is considering using the Groupon platform to sell excess inventory. We discuss how demand functions can be derived using management knowledge. Then, using a single period model where excess inventory is exogenous, we show that the decision to use Groupon and the price to set on that channel depend on two parameters: the relative price sensitivity of Groupon customers as compared to the retailer's regular customers and the relative size of the Groupon market as compared to the regular market. Under a two-period model, when initial inventory is a decision, we show optimal inventory quantities. Our two-period model suggests that managers may plan on using Groupon and order inventory accordingly. We discuss the implications on third party channels as well as retail managers.