Fearless Idea 30: Leverage Your Bargaining Power

SMITH BRAIN TRUST — The daily deal industry — Groupon and like companies working with small retailers to give big discounts, irregularly — had its heyday in the wake of the Great Recession. Groupon in 2010 was called the “fastest growing company in history,” while smaller, D.C.-based Living Social’s value peaked at around $4.5 billion in 2011, then plunged in the low tens of millions before the company was acquired by Groupon in late 2016.  Though a smaller part of the market today, the daily deal model presents a case study of bargaining power examined in a new paper coauthored by marketing professor Lingling Zhang at the University of Maryland's Robert H. Smith School of Business.

Related research has “largely assumed that platforms like Groupon dominate the pricing decision,” writes Zhang, with coauthor Doug J. Chung of Harvard Business School. But in practice, bargaining power is fluid between the retailer and platform in a way that means growth for the platform diminishes its rate of revenue.

While a platform’s large customer base, like Groupon’s, is attractive to merchants, its inherently strong bargaining power can work against it.

“In a nutshell, when prices are negotiated, lack of bargaining power actually helps smaller platforms attract merchants while the larger platforms are, to a certain extent, disadvantaged by the bargaining power,” write Zhang and Chung. Likewise, as the smaller platform expands its network to increase its bargaining power, “it’s able to boost its short-term profits but loses its attraction in acquiring merchants.”

This dynamic makes for a trade-off between growing revenue and growing the network. When the platform seeks to grow its base, it can negotiate a price that’s merchant-friendly, Zhang and Chung say. If it seeks to maximize its revenue in the short term, the platform can leverage its bargaining power to do so. 

Read more: Strategic Channel Selection with Online Platforms: An Empirical Analysis of the Daily Deal Market by Lingling Zhang and Doug J. Chung is a working paper.

Lingling Zhang is an assistant professor of marketing at the University of Maryland's Robert H. Smith School of Business.

Research interests: The effect of marketing strategies using data-driven empirical models; digital and multi-channel marketing; and econometric modeling of large quantity field data.

Selected accomplishments: Presented research at the INFORMS Marketing Science Conference and the Marketing Dynamics Conference; Fellow, American Marketing Association-Sheth Foundation Doctoral Consortium.

About this series: The Smith School faculty is celebrating Women’s History Month 2017 in partnership with ADVANCE, an initiative to transform the University of Maryland by investing in a culture of inclusive excellence. Daily faculty spotlights support activities from the school’s Office of Diversity Initiatives, culminating with the sixth annual Women Leading Women forum on March 30, 2017.

Other fearless ideas from: Rajshree Agarwal  |  Ritu Agarwal  |  Leigh Anenson  |  Kathryn M. Bartol  |  Christine Beckman  |  Margrét Bjarnadóttir  |  M. Cecilia Bustamante  |  Rellie Derfler-Rozin  |  Waverly Ding  |  Wedad J. Elmaghraby  |  Rosellina Ferraro  |  Rebecca Hann  |  Amna Kirmani  |  Hanna Lee  |  Hui Liao  |  Wendy W. Moe  |  Courtney Paulson  |  Louiqa Raschid  |  Rebecca Ratner  |  Rachelle Sampson  |  Debra L. Shapiro  |  Cynthia Kay Stevens  |  M. Susan Taylor  |  Vijaya Venkataramani  |  Janet Wagner  |  Yajin Wang  |  Yajun Wang  |  Liu Yang  |  Jie Zhang  |  Lingling Zhang  |  PhD Candidates