Downstream Information Sharing and Sales Channel Selection in the Platform Economy

Abstract

The term platform economy refers to a business practice in which online retailers serve as transaction platforms that connect upstream suppliers with downstream buyers. Each transaction platform has a traditional retail channel where a supplier can sell products indirectly to customers. In addition, a supplier can employ a commission channel to sell products directly to customers by paying a fixed entry fee and a transaction-based commission fee to the online retailer. This paper investigates an online retailer’s incentive for demand information sharing with an upstream supplier who has already built a retail channel but possesses an incentive to establish a commission channel. We show that the online retailer may voluntarily disclose her private demand information with the supplier, which can generate two effects to her benefit. First, when both the competition intensity and the entry cost are low, such that the supplier is inclined to set up a commission channel, information sharing generates an efficiency effect that reduces double marginalization by helping the supplier to make more precise price and quantity decisions that can alleviate channel competition and also benefit the online retailer. Second, when the entry cost is medium, the supplier will not set up a commission channel when there is no information sharing. In this case, the online retailer will share the demand information with the supplier resulting in an inducement effect that facilitates the establishment of a commission channel. We also consider the model that the supplier leads by deciding whether to establish a commission channel prior to the online retailer’s information sharing decision, and identify the firms’ adverse preferences toward both models.

Keywords: Information sharing, Channel selection, Game theory, Platform economy