Local Market Characteristics and Online-to-Offline Commerce: An Empirical Analysis of Groupon

Abstract

We investigate the factors that affect the growth of Groupon, the leading online daily deals platform. We concentrate on the online-to-offline (O2O) aspect of the business that differentiates it from other e-commerce platforms—its strong connection to local markets. We focus on travel cost and store density, the key local characteristics that affect consumer deal demand and merchant deal offering. Using a comprehensive longitudinal data set on deal offerings and sales across local markets, and combining it with local market characteristics, we estimate a simultaneous equation model of the weekly number of deal offerings and deal sales characterizing the two-sided nature of the platform. We find that the word-of-mouth effect on the consumer side and the observational learning effect on the merchant side contribute to and reinforce the expansion of a two-sided platform. However, a larger number of deals intensifies the competition, which then lowers per deal sales and limits the number of deal offerings. We find that local characteristics have significant impact on both the deal demand and the supply side. We further use model simulation to show how differences in growth patterns across markets may be driven by local characteristics, and we decompose their relative impact on the demand and supply sides. The paper provides managerial implications for firms specializing in O2O commerce. This paper was accepted by Matthew Shum, marketing.