Bargaining Power on Daily Deal Sites: It's About Scale

Everyone is looking for a good deal on sites like Groupon and LivingSocial – including the merchants who use the platforms to attract new customers and the daily deal sites themselves. The bigger the online platform, the more bargaining power it wields over merchants, new research from the University of Maryland’s Robert H. Smith School of Business shows.

In a new study forthcoming in Marketing Science, Maryland Smith assistant marketing professor Lingling Zhang and a co-author from Harvard Business School investigate how the prevalence of online platforms opens doors for traditional businesses to innovate — that is, get access to more customers and grow their revenues –– and how the size of the platform they partner with affects their success.

Merchants haggle with platforms to set the wholesale prices of deals offered to consumers. Working with larger platforms gives merchants access to a larger customer base, but also lowers their margins as they have less bargaining power during price negotiations. Because of this, the researchers say merchants with lower bargaining power benefit more by working with smaller online platforms.

Zhang and her co-author used data from the U.S. daily deal market, with known platforms including Groupon and LivingSocial, that connect a merchant and consumer through sale of a daily assortment of discounted goods and services.

“The daily deal market is a representative platform business, and price bargaining is an important element in the interactions between platforms and merchants,” they write.

Their research showed that bargaining and competition throughout the market jointly determines price and firm profits.

“By working with a bigger platform, merchants enjoy a larger customer base,” write the researchers. “But they are subject to lower margins due to less bargaining power during negotiations. Our results reveal the underlying primitives that determine pricing and the profit split between the platforms and merchants.”

The researchers used both a demand-side model and a supply-side model to track how platforms and merchants negotiate a wholesale price, then platforms set the deal price. Then they modeled and tracked sales data.

Ultimately, the market proved largely to be a duopoly competition between Groupon and LivingSocial, where much of the data was generated.

“The daily deal business is a multibillion-dollar market in the U.S. alone and is even more profitable in developing economies, making it an important market to study in its own right,” they write.

“Price Bargaining and Competition in Online Platforms: An Empirical Analysis of the Daily Deal Market” is featured in Marketing Science.