Media Releases

Is the deal on? Study from Rotman School shows why herd mentality best mode for group buying sites.

February 21, 2012

TORONTO, ON – We might like to think we’re not influ­enced by oth­er peo­ple.

But a new study into group buy­ing mech­a­nisms — like those used on pop­u­lar inter­net web­sites such as Groupon and Liv­ing­So­cial — reveals that telling buy­ers who come lat­er to the offer how many have already signed up increas­es the num­ber of pur­chasers.

 Researchers at the Uni­ver­si­ty of Toronto’s Rot­man School of Man­age­ment want­ed to under­stand why group buy­ing sites that have entered the mar­ket recent­ly have enjoyed greater suc­cess than those oper­at­ing a decade ago, such as Mer­ca­ta and Mob­Shop. Ear­li­er attempts typ­i­cal­ly left poten­tial buy­ers wait­ing for days before con­firm­ing whether or not they had got the offer they had signed up for.

 “We think one of the rea­sons group-buy­ing has been suc­cess­ful recent­ly is because of the short time hori­zon,” says Rot­man Prof. Ming Hu, who co-wrote the study with Prof. Mengze Shi and PhD stu­dent Jiahua Wu. “It allows for a herd­ing effect.”

 Anoth­er rea­son is the use of an infor­ma­tion struc­ture that dis­clos­es to lat­er arrivals how many have already signed onto the deal. Researchers looked at two ways of design­ing the pur­chas­ing mech­a­nism for a group buy: a simul­ta­ne­ous mech­a­nism, where no one knows how many buy­ers have come before them, and a sequen­tial mech­a­nism, where a sec­ond group of buy­ers has the advan­tage of know­ing the size of the first group.

The researchers’ ana­lyt­i­cal mod­el shows the most suc­cess­ful mech­a­nism is the sequen­tial one because it elim­i­nates uncer­tain­ty for those com­ing lat­er to the deal, and improves the con­fi­dence of those who sign on ear­ly, as they’re able to track the num­bers of those who come after them.

“That boosts con­fi­dence,” says Prof. Hu, who teach­es oper­a­tions man­age­ment. Deals for “lux­u­ry” ser­vices, vs. every­day items, work bet­ter in a group buy sce­nario because they offer con­sumers a greater ben­e­fit.

Group buy­ing sites have become increas­ing­ly pop­u­lar recent­ly, but group buy­ing has appeared in var­i­ous incar­na­tions for hun­dreds of years. The web­site links artists with poten­tial buy­ers who can con­tribute to the artist’s pro­posed project. If enough buy­ers com­mit to finan­cial­ly sup­port the project, the project goes ahead. Musi­cians such as Beethoven and Mozart used the same mech­a­nism to sell tick­ets to their con­certs.

Group buy­ing has also been used to obtain dis­counts — if enough buy­ers com­mit with­in a cer­tain time­frame, they can obtain a sub­stan­tial cut on the reg­u­lar price. Although a hall­mark of most group buy­ing sites is that com­mit­ted mon­ey is refund­ed if the deal gets called off, pur­chasers still expe­ri­ence a “psy­cho­log­i­cal loss” when that hap­pens, and may be more will­ing to sign on to a deal they feel is guar­an­teed to hap­pen.

For the lat­est think­ing on busi­ness, man­age­ment and eco­nom­ics from the Rot­man School of Man­age­ment, vis­it The Rot­man School of Man­age­ment at the Uni­ver­si­ty of Toron­to is redesign­ing busi­ness edu­ca­tion for the 21st cen­tu­ry with a cur­ricu­lum based on Inte­gra­tive Think­ing. Locat­ed in the world’s most diverse city, the Rot­man School fos­ters a new way to think that enables the design of cre­ative busi­ness solu­tions. The School is cur­rent­ly rais­ing $200 mil­lion to ensure Cana­da has the world-class busi­ness school it deserves. For more infor­ma­tion, vis­it


For more infor­ma­tion:

Ken McGuf­fin
Man­ag­er, Media Rela­tions
Rot­man School of Man­age­ment
Uni­ver­si­ty of Toron­to
Voice 416.946.3818

Fol­low on Twit­ter @rotmanschool