A Research on the Exclusive Behavior of E-commerce Platforms under the “Free” Business Model

Abstract

It has been frequently reported that many Internet platforms with the free” business model usually compete through signing exclusive dealings with their content providers （or sellers）, and this phenomenon becomes increasingly popular in the digital age. By far academic researches on the exclusive behavior remain ambiguous. In an effort to explore the potential motivations of platforms’ exclusive behavior, this paper path-breakingly analyzes the relationship between cross-network externality and the exclusive behavior from the angle of the business model by developing a duopoly dynamic game model within two-sided markets. The either-or” problem between the two internet giants of China’s E-commerce platforms—Tmall and JD, is under consideration as a case. This paper finds that: （1） In unilateral foreclosure, the platform unilaterally has the incentive to compel its multi-homing sellers not to join its rival platform when the cross-network externality in the seller side is relatively high. Holding the number of consumers constant, the exclusive platform is able to charge a higher per-transaction fee with a higher product price when compared to the benchmark case without exclusivity; while the non-exclusive platform charges a higher per-transaction fee with zero product price compared to the benchmark case, which could make its rival’s profits reduce to zero. Thus, it is suggested that the exclusive competition with the free” business model is more exclusive, and consumer surplus and social welfare are clearly lower than the case without exclusive dealings due to the distortion of competition in the seller side. （2） In bilateral foreclosure, duopoly platforms charge a higher per-transaction fee with a lower product price relative to the benchmark when the cross-network externality in the seller side is relatively high, which generates lower profits compared to the benchmark. At this point, the effective number of sellers becomes the lowest among the three cases, which would result in a lower consumer surplus and social welfare. When the externality is relatively low, both of the platforms will not foreclose （the benchmark）, and consumer surplus and social welfare are higher than the case of unilateral foreclosure, but is lower than the benchmark. （3） When the choice of the exclusive behavior is endogenous, both of the platforms will offer exclusive dealings when the cross-network externality in the seller side is high, though this would lead to the prisoners’ dilemma. However, duopoly platforms will not implement the exclusive behavior when the externality is relatively low. Different from the traditional research, this paper develops a theoretical framework based on the free” business model of Internet platforms, and incorporates the rationality of co-existence of multi-homing sellers and single-homing sellers. Traditional relevant studies only consider that all of the sellers are multi-homing in equilibrium and have not taken the business model into consideration, while this paper theoretically extends the related research on the platform exclusive dealing. When considering the distortion of competition, the exclusive behavior always results in the decline of consumer surplus and social welfare. Therefore, this paper is helpful for understanding the relationship between the business model of E-commerce platforms and the highly controversial either-or” debate in reality. In terms of protecting competition, the exclusivity of platforms with strong attraction for the seller side should be concerned by antitrust authorities.