Differentiated Network Effects: The Case of Daily-Deal Platforms

Abstract

Daily-deal platforms have been in the spotlight in recent years. Originated from the group-buying selling strategy, these platforms have now shifted toward a business model that combines deep discount and advertising. We analyze the structure of daily-deal platforms from the two-sided market perspective. On the two sides of a monopoly daily-deal platform, sellers and buyers choose whether to subscribe to the platform based on their short- and long-term payoffs, which are further contingent on the composition of the other side. In additional to the traditional measure of customer valuation, we use the seller awareness, namely, whether a buyer is aware of a seller prior to the deal, to classify sellers and buyers and calculate their payoffs accordingly. We then translate the general model into a concrete example, in which we derive the participation condition of buyers and the optimal pricing decision of sellers in the homogeneous case and prove the existence of Nash equilibrium to the pricing game of sellers in the heterogeneous case. The role of the platform is also examined. Our results demonstrate the presence of differentiated network effects on the platform and shed light on how the platform may benefit from the control over the enrollment on the seller side.

Keywords: two-sided market, daily-deal platform, equilibrium, pricing

JEL Classification: C72, L14