Exploring service positioning in platform-based markets

Online to offline (O2O) platforms have been widely used in practice, enabling consumers to search for information and purchase products or services online and then consume offline. Service differentiation, however, becomes a critical issue for competing firms when they join an O2O platform. This paper examines the impact of an O2O platform in the cinema industry by developing a general duopoly competition model. We find that after joining an O2O platform, competing cinemas should differentiate themselves less as either of two factors increases: the total market size or the proportion of audience members preferring movie ticketing services through the O2O platform. Based on analytical results from the model, we further develop hypotheses in the context of China's cinema industry, where O2O platforms play a major role in cinemas' total revenue. In order to further define the practical implications of the theoretical analysis, we conduct an empirical study, using real data collected from the Chinese cinema industry to demonstrate the impact of two major factors on service differentiation between cinemas that have joined O2O platforms. To align our empirical research with the Hotelling setting in the analytical model, five pairs of cinemas are selected using the partition clustering approach. We employ panel-data empirical models to test our hypotheses and conduct robustness checks. The findings confirm hypotheses regarding service differentiation in platform-based markets. Implications and insights are also discussed in this paper.