Two-Sided Platform Competition in the Online Daily Deals Promotion Market

Posted by D. Daniel Sokol

Aurora Garcia-Gallego (Universitat Jaume I), Nikolaos Georgantzis (University of Granada – Campus La Cartuja, Universitat Jaume I) and Gerardo Sabater (LINEEX and University Jaume I of Castellon) address Two-Sided Platform Competition in the Online Daily Deals Promotion Market

ABSTRACT: We empirically investigate the platform competition in the online daily deals promotion market that is characterized by intense rivalry between two leading promotion sites, Groupon and LivingSocial, that broker between merchants and consumers. We find that deals offered through Groupon, the incumbent, sell more and generate higher revenues than those offered by LivingSocial, the entrant. We show that the greater network size in the consumer side entirely explains the incumbent’s lead in the merchant side performance, indicating the existence of cross-side network effects at the aggregated market level. However, this performance advantage is dampened by the entrant’s competitive chasing at local markets through offers of greater discounts and lower prices. Moreover, the incumbent advantage quickly attenuates as the merchants repeat promotions over time. These countering forces appear to prevent this market from achieving a tipping equilibrium. Our findings thus help explain why different market structures arise in two-sided markets with network externalities.