For Whom Online Marketplace Should Flourish: Implications from Policy Perspectives

Abstract

The online marketplace continues to emerge as a mainstream sales channel for product sellers. The marketplace (e.g., Amazon) is a leading e-commerce platform, known as an efficient form of a new channel, increasing sellers’ sales opportunities, improving channel performance, and enhancing consumer surplus. However, sellers have seethed and regulators expressed great concerns about the marketplace's excessive clout. In this paper, we investigate how the retail behemoth allegedly uses its marketplace to exploit sellers and drive down consumer surplus, from a policy maker’s perspective. We find that the idea of the marketplace, as an efficient platform to help sellers or consumers or both, is delusional. The marketplace takes full advantage of its leverage, redistributing the surplus of the participants favorably for its own profit. For comparison, we consider other two distinct retail formats: a reseller (e.g., Amazon Retail) and an enabler (e.g., Buy on Google). The marketplace is the worst for the sellers without exception; moreover, an enabler does not always help benefit them while it does so for consumers. In contrast to common beliefs, the reselling model performs the best in favor of sellers as they face a race to underprice, in which the marketplace is as bad as the reseller in terms of consumer surplus and its societal benefit is also negligible. We propose a modified model wherein the marketplace's decision is intervened to guarantee the sellers' profit. We show that it can Pareto dominate for all stakeholders, protecting sellers, improving consumer and social welfare, and resolving channel inefficiency.

Keywords: Regulation, Marketplace, Reseller, Enabler, Competition, E-commerce