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

Yiting Deng (), Christopher S. Tang (), Wei Wang () and Onesun Steve Yoo ()
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Yiting Deng: UCL School of Management, University College London, London E14 5AB, United Kingdom
Christopher S. Tang: UCLA Anderson School of Management, University of California, Los Angeles, Los Angeles, California 90095
Wei Wang: School of International Trade and Economics, University of International Business and Economics, Beijing 100029, China
Onesun Steve Yoo: UCL School of Management, University College London, London E14 5AB, United Kingdom

Service Science, 2023, vol. 15, issue 4, 233-249

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.

Keywords: online platform; platform entry; spillover; market potential (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:inm:orserv:v:15:y:2023:i:4:p:233-249

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