Economics of Daily-deal Business Models

Daily-deal business model is a type of performance-based advertising wherein a publisher provides advertising space to a merchant who pays a proportion of revenue generated on the website to the publisher. We develop a two-period model to capture the strategic interaction between a publisher and a merchant where consumers are heterogeneous in their willingness to pay for quality and awareness about a merchant’s product offering. In our Stackelberg game, publisher is the leader who decides the revenue sharing ratio and the merchant is the follower who responds by choosing appropriate discount rate of the deal offering and whether to offer a deal on the publisher’s website. Our analysis shows that s merchant may increase or decrease discount rate on the website depending on the trade-offs associated with four effects -advertising, sampling, cannibalization and revenue sharing. Surprisingly, the effect of a dailydeal publisher’s revenue sharing contract on a merchant’s participation strategy may not vanish even when the publisher’s revenue sharing ratio is zero. We recommend that a publisher should take into account the merchant’s marginal cost, proportion of informed consumers and consumer characteristics in formulating appropriate customized revenue sharing contract.