The Golden Football and the Economics of Groupon

1. This analysis implies that a business would agree to work with Groupon if their sole goal were to maximize today's profits. That's unrealistic.

2. Many Groupons are service oriented. This analysis seems more suited to the production and sale of a physical good. Service oriented businesses have constraints as to how many customers they can serve at a given time (i.e. they generally don't scale, and if they do the quality degrades).

3. On a given transaction, there won't be increased profits for the merchant. Despite the increase in demand, Groupon is taking a 50% cut and I don't think that the demand increase can compensate for the commissions exacted by Groupon.

Those are my "dummies" points. I don't have the econ. background to talk specifically about the supply/demand graphs :(

GroupOn?

group-on?

You reek of bias when you take little jabs at a company by misspelling their name. It's immature and distracts from your more substantive points.

I had to stop reading Mark Cuban's blog when he kept writing about MicroSoft. I'd like to think that HN is more mature than this...

1) Provides immediate or near-immediate cash flow to businesses in a bad economy who do not necessarily have great options for raising capital quickly. If you sell 3,000 groupons for an hour-long massage, you're about to get a check for close to $100,000 sometime within the next two weeks. Your employees have to do some work later, whatever, that is $100,000 that can pay the rent and keep the lights on today.

2) Breakage. It will depend on the particular offer, but some portion of Groupons will be sold but never redeemed. Free money for Groupon and the business, what isn't to like?

3) Customer acquisition: many of the companies use the Groupon as a loss-leader to get customers in the store for either upsells ("dinner is deeply discounted, wine is available at the standard prices") or establishing a recurring relationship. Seen in this light, it is just another marketing channel, except one which causes positive cash flow right after you sign on the dotted line as opposed to negative cash flow.

4) Some businesses which offer groupon have unit economics where a marginal customer is essentially pure profit, and anything they can do to get a marginal customer is economically justifiable as long as it doesn't cause spillover effects to the main business. A lot of the service industry is like this: as long as you operate below 100% capacity, the cost of servicing one additional customer is too low to measure. (Beauty salons which pay salaries pay whether the manicurist has someone's hands in hand or not.) As long as you don't cannibalize your existing customer base, it is worth getting a marginal manicure customer at nearly any price you can negotiate.

Those are two different things. The vast majority of demand curves are downward sloping. (The exception being products which show strong network effects.) The key thing about a monopoly is that it is a price-setter, not a price-taker.