Decentralized Pricing and Capacitated Assortment Planning in an Online Marketplace

Abstract

Online marketplaces (OMs) operate as intermediaries connecting sellers to consumers. An OM typically determines the assortment of the sellers displayed on its platform and charges commission fees on the sales of selected sellers to maximize its expected revenue. Each selected seller, to maximize its profit, then decides the price of its product in response to other sellers’ behavior on the platform. To model the interactions between the OM and the sellers, we develop a Stackelberg game and consider two types of competition among the sellers: Bertrand and Cournot. We also introduce a monopoly model, in which the OM makes pricing decisions while guaranteeing that the selected sellers’ profits are no less than their target profits.

Under the Bertrand and Cournot competitions, we characterize the optimal assortments by proving that the OM uses all the platform’s capacity, and the sellers with higher adjusted-cost attractiveness have higher priorities to be included in the assortment. The optimal market share and profit of a seller with a higher cost-adjusted attractiveness are higher than those of a seller with a lower cost-adjusted attractiveness, even though the seller with a higher cost-adjusted attractiveness needs to pay a higher commission fee. We also show that the OM has higher revenue and total market share under Bertrand competition than those under Cournot competition. In contrast with the oligopoly models, the optimal assortment under the monopoly model may not be using all the platform’s capacity. Nevertheless, the OM’s profit and total market share considerably increase compared to the oligopoly models when the sellers’ target profits are set at their equilibrium profits.

Keywords: online marketplace, assortment planning, personalized commission fee