Who Benefits from Platform Entry if Multi-Agent Prices Signal Product Quality?

Abstract

Merchants are wary of a platform entering as a competitor and adversely affecting sales and margins. A platform wanting to maximize profits is interested also in gaining consumer trust and confidence by providing credible quality information to consumers. As a practical matter, could a platform benefit by entering, by using multi-sender prices as signals to alleviate consumers’ uncertainty of quality? Further, can a merchant also benefit from platform entry? We answer these questions by analyzing strategic pricing by a platform and merchant under quality uncertainty. We innovate by modeling platform-merchant competition in a leader-follower framework and characterizing the sub-game perfect pricing strategy that is also PBE with consumers resolving quality uncertainty using both platform and merchant prices. We find that platform entry and resulting multi-agent signaling can help to inform consumers of quality. Consumers can benefit by lower prices and increased market coverage. An important result is that conditions exist for an equilibrium outcome identical to complete information. Even more interesting, the platform, merchant and consumers could all be made better off by platform entry.

Keywords: Multisender Signaling, E-commerce, Online Selling, Merchant Profits, Platform Entry, Product Quality, Pricing Strategy, Game Theory