Profitably Limiting Platform Assortment: Analysis of Platform and Merchant Strategy Under Multi-Sender Price Signaling

77 Pages Posted: 17 Jun 2018 Last revised: 2 Jan 2020

See all articles by Ye Qiu

Ye Qiu

Advanced Institute of Business, Tongji University, Shanghai, China

Ram C. Rao

The University of Texas at Dallas, Naveen Jindal School of Management

Date Written: June 1, 2018

Abstract

Managing merchants challenges a selling platform. Using a multi-sender framework we ask if a platform and a competing merchant’s prices can together signal product quality if consumers’ information is incomplete. We find that both separating and pooling equilibria exist but for separation what is critical is that there are two senders with the merchant playing a key role. On the other hand, a single firm’s prices do not signal quality, thus highlighting multi-sender signaling. A practical question we ask: can the platform use a limited assortment strategy to profitably eliminate the need for price signaling? We use our signaling results to compare the profits of signaling to the limited assortment strategy that has multi-period implications. The assortment strategy is indeed profitable under conditions we identify. We then prove the existence of such a profitable strategy constructively. We find the strategy to be especially profitable when the incidence of a low quality product occurs with small probability, and with a significantly lower quality. We also display casual observation of the effect of Amazon entry on prices and sales with a few examples that is in accord with our theoretical results.

Keywords: E-commerce, Online Selling, Platform Design, Multi-sender Signaling, Product Quality, Pricing Strategy, Assortments, Game Theory

Suggested Citation

Qiu, Ye and Rao, Ram C., Profitably Limiting Platform Assortment: Analysis of Platform and Merchant Strategy Under Multi-Sender Price Signaling (June 1, 2018). Available at SSRN: https://ssrn.com/abstract=3188528 or http://dx.doi.org/10.2139/ssrn.3188528

Ye Qiu (Contact Author)

Advanced Institute of Business, Tongji University, Shanghai, China ( email )

Ram C. Rao

The University of Texas at Dallas, Naveen Jindal School of Management ( email )

Dallas, TX
United States
972-883-2580 (Phone)
972-883-6727 (Fax)

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