'Fulfilled by Amazon': A Strategic Perspective of Competition at the E-commerce Platform
24 Pages Posted: 30 Oct 2018
Date Written: October 22, 2018
This paper examines the economic effects of the fulfillment services offered by Amazon (FBA) to the third-party sellers on its retail platform (Amazon 2018). Logistics is critical for e-commerce. By FBA, the service levels of the third-party sellers are substantially improved, and so is their competitiveness. We develop a strategic competition model to understand why Amazon is willing to provide such services to its potential competitors. Interestingly, we find that although FBA may intensify the service competition, it can mitigate the price competition, besides the direct revenue Amazon collects from the services. The latter effects dominate the former when the cross-service sensitivity of the consumers is either sufficiently low or sufficiently high. Therefore, not only the third-party sellers but also Amazon can benefit from FBA. Moreover, since the sales of Amazon's products may increase due to FBA, its OEM suppliers can gain from FBA too. This finding extends to the setting where Amazon's OEM suppliers may strategically adjust their wholesale prices in response to the change of the downstream competition due to FBA. In fact, this wholesale price effect can help Amazon when FBA is detrimental given that the suppliers may lower their wholesale prices. Of course, it can also reduce the benefit of FBA for Amazon when the suppliers increase their wholesale prices.
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