New Media Advertising and Retail Platform Openness
39 Pages Posted: 21 Nov 2015 Last revised: 19 Feb 2018
Date Written: August 1, 2014
We recently have witnessed two important trends in online retailing: The advent of new media (e.g., social media and search engines) makes advertising affordable even for small sellers, and large online retailers (e.g., Amazon and JD.com) open their platforms to allow even direct competitors to sell on their own platforms. We examine how a new media advertising option affects retail platform openness. We develop a game-theoretic model in which a leading retailer has both valuation and information advantages over a third-party seller that can come from its reputation and brand awareness. We find that the availability of relatively low-cost advertising through new media plays a critical role in driving the leading retailer to open its platform and to form a partnership with the third-party seller, which would be impossible in the absence of the low-cost advertising option. The low-cost advertising option can increase sales diversity and consumer surplus either directly via the third-party seller's advertising or indirectly via the partnership on the leading retailer's platform. We also find that the leading retailer has a greater incentive to open its platform and that the partnership is more likely to be formed in either of two cases: if the leading retailer can control the third-party seller's exposure on its platform or if the leading retailer can offer a direct advertising service to the third-party seller. Our analysis offers important insights into the underlying economic incentives that drive the emerging open retail platform trend in the era of new media advertising.
Keywords: Online Platform, Platform Openness, Online Advertising, Long Tail
JEL Classification: D37, M2
Suggested Citation: Suggested Citation