Groupon's Market Power

There has been a lot of talk about Groupon over the past couple of weeks due to their initial public offering on November 4th. Although Groupon enjoyed a strong IPO many analysts have raised concerns over the company’s long term viability. There was an interesting article in Forbes last week that spoke about Groupon’s economic strengths and weaknesses. The article, entitled "Groupon’s Advantage", makes points as to why Goupon’s business model works so well now and why it is not sustainable in the future.

We all know how Groupon works, by providing strong word of mouth marketing to suppliers and deep discounts to consumers. This business model was a brilliant idea and has proven to be a very successful one. However, I completely agree with the Forbes article contributor, Dr. Mourdoukoutas, who states that unless Groupon makes changes to its business model they will not be viable in the long run.

In chapter 8 of our textbook it talks about the conditions that give a company market power. These conditions are: having access to a unique resource, control over intellectual property, economies of scale, product differentiation, and regulation. As I study Groupon I do not find them strongly possessing any of these conditions. A firm must have market power to prevent its competitors from entering the market and gobbling up their market share. Due to a lack of barriers to entry we can see that the Groupon business model is being duplicated many times over across the country. In fact, there are currently 3 web based group discount companies existing in St George alone. Groupon has a size advantage over many of its new competitors, however there are other companies with similar large user bases such as Amazon, Google, and Priceline that can enter the online group discount market at any time. I think Groupon must gain market power and keep competitors out of the market if they want to survive in the long run. It will be interesting to see what Groupon does with their newly raised IPO capital to help them strengthen their market power and sustain long term viability.

1 comment:

Dr. Tufte said...

I think the strength of their position could also be due to a network externality (Chapter 12).

In this situation, the value of the product to a potential buyer depends on the depth of the network that a purchase connects them into. A lot of internet success stories have been based on being the first firm to reach the tipping point where that network externality becomes self-sustaining.

I think in Groupon's case, that this is the biggest situation in the last few years where investors sense a network externality.