Signaling Effects of Daily Deal Promotions

Daily deal sites like Groupon and LivingSocial have been growing at an impressive rate. These sites provide merchants a new channel to advertise. A question is that if daily deals can help a merchant to signal its good quality. To answer this question, we present a signaling model, in which the discount level is a choice variable of a merchant who offers a product on a daily deal site, and may be used as a signal for the initially unobservable quality of the product. Repeat purchases and commission charged by the daily deal site play crucial roles in our model.

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