Can Third-Party Sellers Benefit from a Platform’s Entry to the Market?

Abstract

Because of 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 can afford to charge a higher price, obtain a higher demand, and earn a higher profit. To provide a plausible explanation for this unexpected exploratory result, we develop a duopoly model that incorporates the changing competitive dynamic before and after the platform’s entry. Specifically, before entry, the platform earns a commission (based on the seller’s revenue), whereas the seller sets its retail price as a monopoly. After entry, the platform earns a profit generated by its direct sales in addition to the commission from the seller. In addition, the seller and the platform operate in a duopoly and engage in a sequential game. By examining the equilibrium outcomes associated with this sequential game, we identify conditions under which the platform’s entry can create a win-win situation for both parties. Specifically, these conditions hold when the platform’s market potential is moderate and when the platform’s entry creates a sufficiently high spillover effect on the seller, providing a plausible explanation for our empirical finding that the seller can benefit from a platform’s entry. Funding: W. Wang acknowledges the financial support from the National Natural Science Foundation of China [Grant 72173019], the Beijing Social Science Foundation [Grant 20JJA004], the Chinese Ministry of Education Research Funds on Humanities and Social Sciences [Grant 21YJA790056], and the Excellent Young Scholar Funds of UIBE [Grant 19YQ17].

Competing platform owners’ entry and an OEM's cooperation response

“…Sharma and Mehra (2021) develop a theoretical model to examine the effect of a platform's entry into an access product market with the quality decision and find that the entry improves the platform's profits because of increased advertising revenue. Deng et al (2023) develop a duopoly model to analyze the evolving competitive dynamics before and after platform entry and identify the conditions under which platform entry can create a win-win situation for both parties. They show that a win-win outcome occurs when the market potential of the platform is moderate and the entry generates a sufficiently high spillover effect on sellers.…”

“…Deng et al. (2023) develop a duopoly model to analyze the evolving competitive dynamics before and after platform entry and identify the conditions under which platform entry can create a win–win situation for both parties. They show that a win–win outcome occurs when the market potential of the platform is moderate and the entry generates a sufficiently high spillover effect on sellers.…”

Impact of certification information on consumer behaviour in hybrid retail platforms: empirical evidence from JD.com

“…In a similar vein, Lai et al (2022) find fulfilment by Amazon (FBA) may intensify service competition between Amazon.com and third-party sellers, but Amazon.com receives the direct revenue from the service. Deng et al (2023) analyse the sales data of a single product category in March 2018 on JD.com and find that third-party sellers offering similar products can charge higher prices.…”

Can an E-commerce Platform and its Third-Party Sellers Benefit From Each Other’s Market Entry?

“…Currently, empirical findings are mixed: Zhu and Liu (2018) find that third-party sellers in the United States tend to decrease the number of products they offer on a platform when it enters the market; however, Dryden et al (2020) find an opposite result using data collected in France and Germany. More recently, Deng et al (2023) analyze data provided by JD.com and find that third-party sellers tend to adjust their price higher and even sell more after the platform's entry. Crawford et al (2022) find Amazon's entry into Germany's Marketplace's Home & Kitchen department to be more aligned with market expansion than business stealing.…”

“…The increased visibility generated by the platform's entry can draw more consumers to examine the product. Consequently, it can expand the market size, which can benefit both the platform and the seller (Kang, 2017;Deng et al, 2023). To account for this "spillover effect," we assume that the market size will increases when an additional entity (e.g., the platform) enters the market.…”