Price Bargaining and Competition in Online Platforms: An Empirical Analysis of the Daily Deal Market

Lingling  Zhang; Doug J. Chung

Article | Marketing Science | July–August 2020

Price Bargaining and Competition in Online Platforms: An Empirical Analysis of the Daily Deal Market

by Lingling Zhang and Doug J. Chung

Abstract

The prevalence of online platforms opens new doors to traditional businesses for customer reach and revenue growth. This research investigates platform choice in a setting where prices are determined by negotiations between platforms and businesses. We compile a unique and comprehensive dataset from the U.S. daily deal market, where merchants offer deals to generate revenues and attract new customers. We specify and estimate a two-stage supply-side model in which platforms and merchants bargain on the wholesale price of deals. Based on Nash bargaining solutions, our model generates insights into how bargaining and competition jointly determine the price and firm profits. Our results show that there is systematic variation in bargaining power between platforms and merchants with different characteristics. By working with a bigger platform, merchants enjoy a larger customer base, but they are subject to lower margins due to less bargaining power during negotiations. Our counterfactual results quantify the value of platforms for merchants and show that merchants with lower bargaining power benefit more by working with a smaller platform. Regarding the impact of price negotiations on platform competition, we estimate that roughly 11% of the deals on a smaller platform are attributable to the platform’s lower level of revenue sharing.

Keywords: business-to-business marketing; platform competition; Two-Sided Markets; price bargaining; daily deals; structural model; Two-Sided Platforms; Competition; Price; Negotiation;

Format: Print

53 pages

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Citation:

Zhang, Lingling, and Doug J. Chung. "Price Bargaining and Competition in Online Platforms: An Empirical Analysis of the Daily Deal Market." Marketing Science 39, no. 4 (July–August 2020): 687–706.

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