Is Investment in Data Analytics Always Profitable? The Case of Third‐Party‐Online‐Promotion Marketplace

Zhe (James) Zhang, Shivendu Shivendu and Peng Wang

Production and Operations Management, 2021, vol. 30, issue 7, 2321-2337

Abstract: Studies show that merchants are heterogeneous in profitability from offering promotions on third‐party‐online‐promotion marketplaces who often charge a single commission rate. Using a data analytics system, a marketplace can classify merchants according to their heterogeneous characteristics and offer merchant‐type specific commission rates. In this study, we construct a game‐theoretic model consisting a marketplace with two types of merchants who have heterogeneous proportion of consumers who are informed about their offering. The types are merchants’ private information, but the marketplace can invest in data analytics capability to classify merchants as per their types with a probability. We study a signal‐based strategy, where the marketplace invests in data analytics capability and offers a specific commission rate to individual merchant based on the merchant‐type classification and compare it with a single‐rate strategy of offering one commission rate to all merchants. We show that the relative strength and weakness of the signal‐based strategy depend on the merchant type distribution and the investment cost of improving the classification accuracy rate. Interestingly, the marketplace can be better off with the single‐rate strategy when a merchant type dominates the market. Moreover, we show that the signal‐based strategy, can lead to an increase in profit for merchants and an increase in consumer surplus. This is so because the marketplace’s signal‐based strategy has a cascade effect on consumers through the merchant’s optimal discount rate strategy. We conclude by identifying the conditions for a win–win–win situation wherein investment in data analytics capabilities by the marketplace also benefits merchants and consumers.

Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://doi.org/10.1111/poms.13379

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:popmgt:v:30:y:2021:i:7:p:2321-2337

Ordering information: This journal article can be ordered from
http://onlinelibrary ... 1111/(ISSN)1937-5956

Access Statistics for this article

Production and Operations Management is currently edited by Kalyan Singhal

More articles in Production and Operations Management from Production and Operations Management Society
Bibliographic data for series maintained by Wiley Content Delivery ().