A stirring effect of the loss leader strategy in a two-sided online platform

Abstract

Loss leader strategy refers to a pricing strategy in which sellers set much lower prices than the original ones for specific products to attract user attention. Similar to brick-and-mortar stores, online marketplaces often try to expose their platforms more visibly to potential buyers by offering a particular product at a lower price. Yet, the effects of the loss leader strategy on the online marketplaces is indeterminate and largely remains an empirical question due to distinguished characteristics of online marketplaces from the traditional retail setting. This study examines the effects of the loss leader strategy in the context of the two-sided online platform, focusing on the changes of both buying and selling sides after the introduction of loss leader. We collaborate with an online travel marketplace that introduced loss leaders (ticket products with lower price) to parts of sub-markets, providing a natural experimental setting for examining the effect of the loss leaders.