Electronic Markets and Geographic Competition among Small, Local Firms

Abstract

We study the impact of electronic markets on small, boutique firms selling presence goods or services – goods or services which must be consumed at the selling firm’s location. These firms have recently begun to compete on electronic markets by selling goods and services through local daily deal sites, such as Groupon and LivingSocial. Previous research has shown that electronic markets make transportation costs less relevant in determining competition among firms selling goods and services that can be consumed at the consumers’ location. However, consumer transportation costs to the firm’s location remain relevant for competition among those selling presence goods. Due to lack of data for such firms, it has been difficult to empirically examine the competition among them. We extract publicly available activity and spatial information from Groupon, LivingSocial, Google Maps, and Flickr to construct a unique panel dataset to study daily deals offered by restaurants and spa vendors in geographical clusters of concentration in 167 distinct cities. This dataset allows us to examine the effect of location on the competition vendors face in electronic markets. We find that as vendors in a particular geographical cluster participate in electronic markets, local competition increases and other vendors in that cluster join the electronic market and deepen discounts in response. However, vendors in other clusters in the same city remain relatively unaffected. We further analyze vendor ratings from Yelp and other infomediaries, to show that lesser known and low quality vendors utilize the advertising effect of electronic markets to increase their awareness among customers. We further test the moderating effect of horizontal and vertical differentiation among firms in geographical clusters on competition in electronic markets, using measures extracted from UrbanSpoon.com. We find that clusters having lower differentiation experience higher competitive effects of firms joining the electronic market. Our findings provide empirical validation of the analytical results in existing literature in an important and understudied context: competition among small businesses selling presence goods and services. Our results have implications for firms and electronic market platforms.