Price Bargaining and Competition in Online Platforms: An Empirical Analysis of the Daily Deal Market

Abstract

The prevalence of online platforms opens new doors to traditional businesses for customer reach and revenue growth. This research investigates platform competition in a setting in which prices are determined by negotiations between platforms (specifically, their salespeople) and businesses. We compile a unique and comprehensive data set from the U.S. daily deal market, where merchants offer deals to generate revenues and attract new customers. We specify and estimate a two-stage supply-side model in which platforms and merchants bargain on the wholesale price of deals. Based on Nash bargaining solutions, our model generates insights into how bargaining power and bargaining position jointly determine price and firm profits. By working with a bigger platform, merchants enjoy a larger customer base, but they are subject to lower margins because of less bargaining power. Counterfactual results reveal that, in the absence of platform competition, merchants are worse off owing to their weaker bargaining position, but consumers experience lower prices, thus leading to an increase in total demand.