Daily-deal market with consumer retention: Price discrimination or quality differentiation

Abstract

In the daily-deal market, a local-service seller contracts with an online platform to acquire and retain new consumers via two marketing strategies: price discrimination (PD) wherein the seller designs a lower price in the daily-deal market for the same level of product quality and quality differentiation (QD) wherein the seller provides a lower product quality and thus a lower price in the daily-deal market. Our paper investigates the underlying mechanisms of these two distinctive strategies by highlighting the retention behavior of new consumers. The retention behavior is built upon product quality offered in the daily-deal market, with a higher quality inducing more advantageous consumer retention. We first show that the seller adopts the PD (QD) strategy if consumer retention is arbitrarily profitable (unprofitable), i.e., consumer retention shows high (low) sensitivity to product quality or decays slowly (rapidly) over time. We then find that the seller's optimal strategy shifts from QD to PD as the profitability of consumer retention increases. Moreover, we uncover the strategic role of platform's agency fees when consumer retention is moderately profitable in which sufficiently high or low agency fees motivate the seller to adopt the PD strategy, whereas middle agency fees lead to the adoption of the QD strategy. Our results have useful implications for the daily-deal industry and cater to the increasing number of offline sellers engaged with online platforms to extend their selling channels.