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Groupon’s business model is based on a combination of “economies of networking” and “economies of scale.” Typically, economies of networking are the benefits associated with a larger and larger number of consumers buying a certain product, the larger the number of people using the product, the more valuable the product to each user—as they apply to software usage. Economies of network in Groupon’s model arise, as soon as threshold is reached, in the form of discounts (coupons) to consumers who participate in the network—the larger the threshold, the larger the discount. This means that economies of networking arise on the demand side of the market, as a result of the strengthening of the consumer bargaining power with product sellers. Economies of scale are the cost savings associated with a larger production scale (size) of certain product, the larger the production scale, the lower the per unit product cost. Manufacturing 1,000 laptops is cheaper than manufacturing 100 laptops. This means that economies of scale arise on the supply side of the market, on the savings from a larger production batch with the same fixed resources, on gains from improved bargaining power with suppliers. Local businesses participating in Groupon’s offerings have a dual benefit. On the one side, they can get a guarantee demand for their products, getting rid of excess capacity, and attaining economies of scale. Second, and perhaps more important, Groupon’s offerings create Word-of-Mouth and buzz for new products and services, helping them reach the “tipping point.”
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