Friend or Foe: When a Platform Enters the Market to Compete with its Third-Party Sellers

Abstract

Due to the informational advantage of online marketplaces (i.e., platforms), it is a common belief that a platform's market entry will be detrimental to third-party sellers who sell similar products on the platform. To examine the validity of this belief, we conduct an exploratory analysis using the sales data for a single product category provided by JD.com for the month of March 2018. Our analysis reveals an unexpected result: Upon the platform's entry, third–party sellers who sell similar products tend to respond by charging a higher selling price and also enjoy a higher sales volume.

To provide a plausible explanation for this unexpected exploratory result, we develop a duopoly model that incorporates the changing competitive nature before and after the platform's entry. Specifically, before entry, the platform and the seller engage in a “vertical competition”: The platform earns a sales-based commission while the seller sets the retail price. However, after entry, the original vertical competition is augmented by a “horizontal competition” that involves direct price competition between the platform and the seller. We find when the platform's entry creates a positive “spillover” effect that enlarges the seller's market potential and when the platform's market potential is moderate, the seller can afford to charge a higher price and sell more following the platform's entry. Hence, the platform's entry can benefit both the seller and the platform (which earns higher sales commissions in addition to its profit generated by direct sales), providing a plausible explanation for our empirical observation.

Keywords: Online platform, platform entry, vertical competition, horizontal competition