Seller Competition in an Online Marketplace: A Social Comparison Perspective

50 Pages Posted: 4 Feb 2015 Last revised: 25 May 2024

See all articles by Yun Zhou

Yun Zhou

McMaster University - Michael G. DeGroote School of Business

Zhoupeng (Jack) Zhang

University of Toronto - Rotman School of Management

Ming Hu

University of Toronto - Rotman School of Management

Haitao (Tony) Cui

University of Minnesota - Twin Cities

Date Written: November 30, 2022

Abstract

How will peer pressure among sellers affect their operations in an online marketplace? Motivated by online platforms' marketplace designs that engage sellers by prompting them to compare their relative performances against each other, in this paper, we will develop and study a price competition model in which sellers consider both their own profits and the expected payoffs from social comparison with their competitor. In particular, our model features two sellers offering substitutable products; Each of them sets prices ex ante to maximize his or her expected total utility, the sum of a seller's expected profit and a social utility of comparison. This latter component in a seller's utility function entails a penalty for his or her anticipated degree of underperformance against the competitor (i.e., sellers are behind averse) as well as a reward for expected outperformance (i.e., sellers are also ahead seeking). We find that, contrary to what extant research on social comparison has and would predict, social comparison is not always pro-competitive. In particular, we show that while the behind aversion aspect of peer comparison fosters competition, the ahead seeking aspect can be anti-competitive when the market uncertainty is sufficiently large. This is because, for any focal seller, market uncertainty amplifies the expected amount of variations in their underperformance (uncertainty effect), which can dwarf the influence generated by the expected performance gap between two sellers (comparison effect); while behind aversion further aggravates the uncertainty effect, ahead seeking counterbalances such extra tension by absorbing part of it into the comparison effect and thus moderates the marginal disutility of lagging behind. Overall, we find that social comparison can intensify sellers' price competition, which lowers the expected profits and utilities for both, benefits the consumers, and reduces the hosting platform's profit. That is, those marketplace design tools deployed by online platforms can backfire and hurt themselves. Our main insights are robust in a number of extensions, including general market size specifications, asymmetric sellers, and sellers' misperceptions of market uncertainties. They highlight the importance of sellers' behavioral regularities in online platforms' daily operations and shed light on marketplace designs regarding algorithmic transparency, information sharing, and so forth.

Keywords: online marketplace, price competition, social/peer comparison, market uncertainty

Suggested Citation

Zhou, Yun and Zhang, Zhoupeng (Jack) and Hu, Ming and Cui, Haitao (Tony), Price Competition in the Presence of Social Comparison and Demand Uncertainty (November 30, 2022). Rotman School of Management Working Paper No. 2559498, Available at SSRN: https://ssrn.com/abstract=2559498 or http://dx.doi.org/10.2139/ssrn.2559498

Yun Zhou

McMaster University - Michael G. DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

Zhoupeng (Jack) Zhang

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6
Canada

Ming Hu

University of Toronto - Rotman School of Management ( email )

105 St. George st
Toronto, ON M5S 3E6
Canada
416-946-5207 (Phone)

HOME PAGE: http://ming.hu

Haitao (Tony) Cui (Contact Author)

University of Minnesota - Twin Cities ( email )

321 19th Ave S
Suite 3-150
Minneapolis, MN 55455
United States

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