Deal or No Deal?: Advertizing and Sampling Effects on Two-Sided Daily Deal Platforms

44 Pages Posted: 7 Apr 2013

See all articles by Shivendu Shivendu

Shivendu Shivendu

University of California, Irvine - The Paul Merage School of Business

Zhe Zhang

University of Texas at Dallas, Naveen Jindal School of Management

Date Written: December 10, 2012

Abstract

With the advent of Groupon.com in 2008, daily deal platforms have seen phenomenal growth. Surprisingly there is very sparse analytical research that has studied the economics of the daily deal platforms which are two-sided in the sense that they connect merchants on the one side to consumers on the other side. We develop a stylized two-period game-theoretic model to analyze the strategic interaction between heterogeneous merchants and consumers. In our conceptualization, a monopolist daily deal platform is revenue maximizer who not only takes into consideration the cross-side network effect leading to the chicken-and-egg problem, but also sampling and advertizing effect due to the presence of the platform. Keeping in view the real-world market conditions, we do not impose the restriction that the two-sides can interact only through the platform and allow the two-sides to transact outside the platform too. We model the strategic interaction between the daily deal website (platform) and merchants as a Stackelberg leader-follower game where merchants choose discount rate, keeping that in view the platform’s choice of the fixed fee rate or revenue sharing rate. Our result shows the merchants offer higher discount rate on the daily deal website than outside the website, and surprisingly, merchants’ optimal choice of discount rate is independent of the platform’s fixed fee rate. We also show that merchants that are new in the market place and, therefore, less well-known gain more from offering a deal on the daily deal website. Some of the merchants never offer a deal on the platform even if offering a deal on the platform is free.

Keywords: Daily deal website, two-sided platform, cross-side network externality, experience goods, sampling effects, advertizing effects

Suggested Citation

Shivendu, Shivendu and Zhang, Zhe, Deal or No Deal?: Advertizing and Sampling Effects on Two-Sided Daily Deal Platforms (December 10, 2012). Available at SSRN: https://ssrn.com/abstract=2245948 or http://dx.doi.org/10.2139/ssrn.2245948

Shivendu Shivendu

University of California, Irvine - The Paul Merage School of Business ( email )

SB 342
Irvine, CA 92617
United States

Zhe Zhang (Contact Author)

University of Texas at Dallas, Naveen Jindal School of Management ( email )

800 W Campbell Road
Richardson, TX Texas 75083-0688
United States

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