Weakening a Competitor’s Market Position on the Merchant Side May Strengthen Its Position on the Consumer Side When Multihoming is Present, New Study Finds

Platform firms, such as Amazon, Uber, or Facebook, are among the most valued public companies in part because of the compatible relationships often forged between these platforms and their complementors—those providing complementary services or products, such as app developers or advertisers. In order to build trust and create transparency between their customers and complementors, platforms often publish ratings or past sales information regarding the performance of these complementors.

In general, this kind of transparency, such as when a daily deal company like Groupon discloses its actual deal sales, benefits the platform because it reduces consumer uncertainty and drives sales. However, a new study focusing specifically on daily deal platforms such as Groupon and LivingSocial has found that such transparency can also enable a rival platform to selectively poach high-performing complementors or consumers from the focal platform.

The study, by researchers at Carnegie Mellon University (CMU) and Harvard University appears in Management Science.

The researchers examined how, in sharing details about its complementors, Groupon made itself vulnerable to a situation known as multihoming, which is when complementors or consumers adopt more than one platform. By sharing deal sales information, Groupon not only drove its revenue by increasing herd mentality on the part of the consumer, but also enabled LivingSocial to identify popular merchants and pilfer off high-quality complementors. Multihoming not only reduces a rival like LivingSocial’s cost of searching for complementors and consumers that might be interested in using its platform, but complementors can also lower the cost of working with the rival platform due to the experience gained from working with the focal platform.

To dig deeper into the phenomena, the researchers leveraged data from the U.S. daily deals market following a policy shift from Groupon that limited the accuracy of the deal sales information displayed in its deal counter. Due to this shift, LivingSocial was unable to glean as much data from Groupon and therefore became less able to poach corresponding merchants from the platform. The researchers then developed a game-theoretical model that accounted for multihoming on both sides of the market as well as the strategic behavior of consumers, platform firms, and merchants. Finally, they developed hypotheses concerning Groupon’s policy shift and empirically tested each.

“Interestingly, we identify a seesaw effect in that reduced merchant-side multihoming led to increased consumer-side multihoming, thereby strengthening LivingSocial’s market position on the consumer side,” says Hui Li, a Carnegie Bosch Assistant Professor of Marketing at CMU’s Tepper School of Business, who co-authored the study.

The researchers sought to create a model that would capture the incentives of multihoming for the platforms, consumers, and merchants. For the platforms, although multihoming helps reduce the uncertainty of deal popularity and potentially lowers deal discovery and acquisition costs, multihoming makes it challenging to differentiate between the two platforms, thereby intensifying the competition.

This trade-off suggests that platforms have incentives to both multihome and search for unique deals. Consumers, on the other hand, are motivated to purchase deals based on variety and deal popularity and are more likely to engage in multihoming when two platforms have significant differences. Alternatively, merchants are motivated by the size of a platform’s consumer base and whether it’s large enough to balance the cost of working with the platform.

The researchers empirically tested several hypotheses based on how LivingSocial behaved following Groupon’s shift in policy. They found that following Groupon’s policy shift, LivingSocial copied fewer Groupon deals and instead focused its attention on sourcing new deals, leading to greater deal variety in the overall market. Because the two platforms had greater differences and more variety, customers were more likely to interact with both platforms. At the same time, the number of exclusive LivingSocial customers increased while the number of exclusive Groupon customers decreased. Ultimately, when Groupon limited information transparency, it reduced LivingSocial’s merchant-side multihoming but increased consumer-side multihoming.

Overall, although LivingSocial benefited from increased consumer-side multihoming, the cost of acquiring new merchants dominated this gain so that LivingSocial’s profitability decreased after the policy change.

“This result illustrates a challenge that platform firms face when multihoming takes place on both sides of their markets: weakening a competitor’s market position on one side of the market may strengthen its market position on the other side,” said Hui. “Therefore, it might become more difficult for one platform to sufficiently reduce its rival’s user bases on both sides to dominate the market.”

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Summarized from an article in Management Science, Information Transparency, Multihoming, and Platform Competition: A Natural Experiment in the Daily Deals Market, by Li, Hui (Carnegie Mellon University) and Zhu, Feng (Harvard University). Copyright 2020. All rights reserved.