Information transparency, multi-homing, and platform competition: A natural experiment in the daily deals market

Abstract

Platform competition is shaped by the likelihood of multihoming (i.e., complementors or consumers adopt more than one platform). To take advantage of multihoming, platform firms often attempt to motivate their rivals' high-performing complementors to adopt their own platforms, or they attempt to prevent their current complementors or consumers from multihoming. In this paper, we study the effectiveness of such strategies in the context of the online daily deals market. We first develop a gametheoretical model that takes into account multihoming on both sides of the market and strategic behavior of all participants - consumers, platform firms, and merchants. We then derive hypotheses and empirically test them. The empirical analysis leverages a policy change of Groupon that reduced information transparency and weakened LivingSocial's ability to identify popular Groupon deals and poach the corresponding merchants. Our results show that limiting information transparency reduced multihoming: after the policy change, LivingSocial copied fewer deals from Groupon and increased its efforts to source new deals. Consequently, industry-wide deal variety increased. We also observe 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. Overall, after accounting for changes in both lifetime value of the customer base and acquisition cost of merchants, Groupon's policy change reduced LivingSocial's profitability.