Fulfillment by Platform: Competition and Upstream Market Power

Abstract

Fulfillment by Platform (FBP) models, in which e-commerce platforms offer fulfillment services to sellers, have become widely adopted. Although these fulfillment models provide improved service to customers, they have recently drawn criticism from sellers, who argue that existing FBP cost structures hurt seller competition and negatively impact market dynamics. This paper evaluates the effects of FBP on market dynamics in light of such recent criticisms. We use data from a leading online retailing marketplace to evaluate concerns about competition and estimate the effect of downstream fulfillment on upstream supply echelons. Our analysis demonstrates that while the adoption of fulfillment services offered by platforms improves consumer welfare, it also increases market concentration among sellers in the upstream markets. To identify consumers' demand and merchants' cost structures, we employ a structural empirical model. Our findings reveal that the current cost structures of FBP hurt upstream market competition, as measured by the Herfindahl-Hirschman index. Specifically, smaller merchants with lower margins are forced to increase their prices more to remain profitable with FBP, leading to a price disadvantage compared to bigger merchants. We find that bigger merchants' profits increase at the expense of smaller players. Merchant welfare for bigger merchants increases by 4.79%, while it reduces by 0.14% for smaller merchants. These findings can have implications for evolving regulatory policies governing two-sided markets. Given the lack of good quality data on both sides of the market in e-commerce settings, our study provides much-needed empirical evidence of platform interventions on market outcomes.

Keywords: Platforms, Regulation, E-commerce, Fulfillment Services, Industrial Organization, Supply Chain Structure

JEL Classification: L1