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

33 Pages Posted: 7 Dec 2021 Last revised: 23 Mar 2022

See all articles by Yiting Deng

Yiting Deng

University College London

Christopher S. Tang

University of California, Los Angeles (UCLA) - Decisions, Operations, and Technology Management (DOTM) Area

Wei Wang

University of International Business and Economics (UIBE) - School of International Trade and Economics

Onesun Steve Yoo

UCL School of Management, University College London

Date Written: March 22, 2022

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

Suggested Citation

Deng, Yiting and Tang, Christopher S. and Wang, Wei and Yoo, Onesun Steve, Friend or Foe: When a Platform Enters the Market to Compete with its Third-Party Sellers (March 22, 2022). Available at SSRN: https://ssrn.com/abstract=3979173 or http://dx.doi.org/10.2139/ssrn.3979173

Yiting Deng (Contact Author)

University College London ( email )

Level 38, 1 Canada Square
London, Please Select E14 5AA
United Kingdom
2031086081 (Phone)

Christopher S. Tang

University of California, Los Angeles (UCLA) - Decisions, Operations, and Technology Management (DOTM) Area ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

HOME PAGE: http://www.anderson.ucla.edu/x980.xml

Wei Wang

University of International Business and Economics (UIBE) - School of International Trade and Economics ( email )

10 East Huixin Street
Chaouang District
Beijing, 100029
China

Onesun Steve Yoo

UCL School of Management, University College London ( email )

1 Canada Square
London, E14 5AB
United Kingdom

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