Strategic Channel Selection with Online Platforms: An Empirical Analysis of the Daily Deal Industry

by Lingling Zhang and Doug J. Chung

Overview — Platform businesses grow by connecting groups of customers. This study sheds light on the relative bargaining power of platforms and merchants, demonstrating that price bargaining power is an important factor to consider in platform competition. When the platform is too big and powerful, its strong bargaining power may push away some business partners and hence slow down growth.

Author Abstract

The platform—a business model that creates value by connecting groups of users—is increasingly popular in many industries. Extant papers largely assume that platforms dominate the pricing decision, whereas in practice, prices in business-to-business transactions are often determined by a bargaining process. We study how the relative bargaining power of business partners affects pricing and competition in a two-sided market. We compile a unique and comprehensive dataset using sales data from the US daily deal market and specify a structural model based on Nash bargaining solutions. We find that Groupon, the larger deal platform, has more price-bargaining power than LivingSocial and that larger and chain merchants have more bargaining power than smaller and independent merchants. The difference in bargaining power between different types of merchants, interestingly, is more substantial on LivingSocial than on Groupon. Therefore, our results suggest that, while the size of the customer base for a larger platform helps attract merchants, its strong bargaining power may motivate some merchants to work with its smaller competitors, over which they have more influence on price setting. Our counterfactual results show that the allocation of price-bargaining power plays an important role in the daily deal markets and that merchants are significantly worse off if platforms have higher price-bargaining power during the negotiation. Furthermore, as it increases the bargaining power, LivingSocial would be able to boost its short-term profits but lose its attraction in acquiring merchants.