Information Transparency, Multi-Homing, and Platform Competition: A Natural Experiment in the Daily Deals Market

Abstract

Many platforms today make a great deal of performance information about their complementors, such as their ratings and past sales, transparent to attract consumers and facilitate matching. Such information transparency, however, can increase multi-homing (i.e., complementors or consumers adopt more than one platform) because rival platforms can use this information to selectively poach high-performing complementors and encourage them to adopt their platforms. In this paper, we study the impact of information transparency on the multihoming behavior of complementors and consumers. First, we develop a game-theoretical model that takes into account multi-homing on both sides of the market and strategic behavior of all parties—consumers, platform firms, and merchants. We then derive hypotheses and empirically test them using data from the U.S. online daily deals market. The empirical analysis leverages a policy change of Groupon that reduced LivingSocial’s ability to identify popular Groupon deals and poach the corresponding merchants. Our results show that limiting information transparency reduces multi-homing: after the policy change, LivingSocial copied fewer deals from Groupon and increased its efforts to source new deals. Consequently, industry-wide deal variety increased. Interestingly, we identify a seesaw effect in that reduced merchant-side multi-homing led to increased consumer-side multi-homing, 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, the policy change reduced LivingSocial’s profitability.