Strategic Channel Selection with Online Platforms

Download or read book Strategic Channel Selection with Online Platforms written by Lingling Zhang and published by . This book was released on 2016 with total page 53 pages. Available in PDF, EPUB and Kindle. Book excerpt: The platform--a business model that creates value by connecting groups of users--is increasingly popular in many industries. Extant papers largely assume that platforms dominate the pricing decision, whereas in practice, prices in business-to-business transactions are often determined by a bargaining process. We study how the relative bargaining power of business partners affects pricing and competition in a two-sided market. We compile a unique and comprehensive dataset using sales data from the U.S. daily deal market and specify a structural model based on Nash bargaining solutions. We find that Groupon, the larger deal platform, has more price-bargaining power than LivingSocial and that larger and chain merchants have more bargaining power than smaller and independent merchants. The difference in bargaining power between different types of merchants, interestingly, is more substantial on LivingSocial than on Groupon. Therefore, the size of a platform has two faces: while a larger customer base helps attract merchants, the platform’s bargaining power may motivate some merchants to work with its smaller competitors, over which they have more influence on price setting. Our counterfactual results show that the allocation of price-bargaining power plays an important role in the daily deal markets and that merchants are significantly worse off if platforms have higher price-bargaining power during the negotiation. Furthermore, as it increases the bargaining power, LivingSocial would be able to boost its profits but lose its attraction in acquiring merchants.