Driving Supply to Marketplaces: Optimal Platform Pricing When Suppliers Share Inventory

Abstract

Problem definition: Marketplace platforms such as Amazon or Farfetch provide a convenient meeting point between customers and suppliers and have become an important element of e-commerce. This sales channel is particularly interesting for suppliers that sell seasonal goods under a tight time frame because they provide expanded reach to potential customers even though it entails lower margins. In this dyadic relationship, a supplier needs to optimize when to share inventory with the platform, and the platform needs to set the right commission structure during the season. Academic/practical relevance: We characterize supplier participation into the platform in a dynamic setting and link it to inventory levels, demand rates, time left in the season, and commission structure. This directly drives the commission structure decision made by the platform. We, thus, provide a framework to evaluate platform commission fee policies, taking into account supplier responses. Methodology: We use an optimal control framework with limited inventory supply and a stochastic demand process. We study the conditions under which the supplier accepts participation and use the platform as a sales channel. We also study the optimal commission structure that the platform should employ and the supplier procurement response. Results: We find that suppliers only participate if inventory is high relative to the time left to sell the items. As a result, the platform can only offer limited supply at the beginning of the season. Given this behavior, we find that the platform and the system are always better off with flexible pricing via fully dynamic commissions, which hurts the supplier the most (better off with less flexible commission fees). Interestingly, when the inventory decision is contingent on the platform pricing policy, the platform often finds it beneficial to commit to a static fee to incentivize the supplier to stock up, highlighting that inability to commit to fixed commissions may destroy value through double marginalization effects. Managerial implications: Our work suggests that short-term profit for the platform is maximized with fully dynamic commission fees at the expense of supplier profit. If inventory is endogenous, suppliers can retaliate by reducing their commitment at the start of the season. Despite the increased revenue obtained with the fully dynamic commission fee, the lost sales from the inventory drop incentivize the platform to opt for supplier-friendly commission fees, which are better for long-term profit.

Sourcing for online marketplaces with demand and price uncertainty

“…This paper bridges the streams of literature on marketplace analytics and supply chain management. The former literature has focused on a rich set of problems in marketplace design and customer analytics, such as two‐sided market design focusing on matching buyers and sellers (Roth & Sotomayor, 1992), development of trust (Pavlou & Gefen, 2004), elimination of information frictions (Fradkin, 2015), demand forecasting and price optimization (Ferreira et al., 2015), competitive and algorithmic pricing (Fisher et al., 2018; Hansen et al., 2021), timing of new product introduction and market entry (Araman & Caldentey, 2016; Sunar et al., 2019), monetization through advertising and transaction fees (Choi & Mela, 2019), and setting the commission structure (Martínez‐de Albéniz et al., 2022). However, the effect of marketplaces on upstream supply chains has not been studied in the literature thus far.…”

Hiding in plain sight: Surge pricing and strategic providers

“…Martínez‐de‐Albéniz et al. (2022) consider a setting in which a strategic supplier reveals inventory information to an online peer‐to‐peer platform, which determines the payout structure so as to incentivize truthful reporting by the supplier. Unlike this stream of research, we focus on the case in which providers collectively decide on the number of providers reporting online as being available.…”

Differential Game Analysis of Shared Manufacturing Platform Pricing Considering Cooperative Advertising Under Government Subsidies

“…Zhao and Chen [20] studied the pricing strategy of capacity-sharing platforms when the demand side of manufacturing capacity was sensitive to the delivery time of the supply side. When suppliers shared inventory in the supply chain, Martínez-de-Albéniz et al [21] investigated the optimal decision-making and driving roles of platform pricing and the market driver. Zhao and Feng [22] explored the pricing strategies of the capacity-sharing platform under the two modes of registration fee and transaction fee in the monopoly manufacturing industry.…”