Platform or Wholesale? A Strategic Tool for Online Retailers to Benefit from Third-Party Information

Abstract

Online retailing is dominated by a channel structure in which a retailer either buys products from competing manufacturers and resells to consumers (wholesale scheme) or lets manufacturers directly sell to consumers on its platform for a commission (platform scheme). Easy access to publicly available third-party information such as product reviews which facilitate consumers' purchase decisions is another distinctive and ubiquitous characteristic of online retailing. We show that retailers can use the upstream pricing scheme, wholesale or platform, as a strategic tool to benefit from third-party information. Information on the quality dimension homogenizes consumers' perceived utility differences between competing products and increases the upstream competition, which benefits the retailer under the wholesale scheme but hurts the retailer under the platform scheme. Information on the fit dimension heterogenizes consumers' estimated fits to the products and softens the upstream competition, which hurts the retailer under the wholesale scheme but benefits the retailer under the platform scheme. Consequently, when the precision of the third-party information is high (low), a retailer can benefit from third-party information by adopting the wholesale (platform) scheme if the quality dimension plays a dominant role and by adopting the platform (wholesale) scheme if the fit dimension plays a dominant role. Furthermore, the effect of precision improvement on the retailer's profit depends on pricing scheme choice and relative importance of quality and fit attributes in consumers' evaluation of products. For instance, when the fit dimension plays a dominant role, increasing the precision can hurt the retailer under wholesale scheme but benefit under platform scheme.

Keywords: online product reviews, pricing scheme, competition, game theory

JEL Classification: L11, L15, D83