Price Bargaining in Daily Deals Market
Before reading Zhang and Chuang’s paper on the daily deal market, my intuition was that competition between platforms gives customers a better deal as they engage in competition for lower price points. And when the customers’ gain increases, merchants would have lower margins as a result. However, it seems like platform competition benefits the merchants as well in light of their research. As many examples we learned in class illustrated, both position in the network (number of outside alternatives) and power of the exchange partner matter in predicting the outcome of an exchange. The researchers’ model of price negotiation in retail markets provides additional proof to these underlying factors that determine how benefits are split in an exchange.
Zhang and Chuang modeled the price negotiation in retail markets between the merchants and the daily deal platforms. When the online daily deal market is not in competition, merchants have low power in the exchange as they have no outside alternatives that are better. The daily deal market possesses a lot of bargaining power because not only does it have a lot of alternatives, its alternatives are weak. However, things change as smaller platforms enter the competition for merchants. Although merchants benefit from increased customers when they make deals with large platforms, they get a fairly small share of the profit, as predicted by the Nash bargaining outcome. On the other hand, trading with a smaller platform gives them more share of the profit despite having less customers. This tradeoff between share of profit and customer accumulation is a decision that merchants now get to make and many merchants indeed benefit more from trading with smaller platforms in the long run.
In light of what we learned in class, trading with a smaller platform would mean that there are less profits on the edge to begin with. However, it would also mean that merchants get a larger share of the profits because the difference in power between the merchants and the platform is smaller.
reference: https://phys.org/news/2020-08-bargaining-daily.html