Business-to-Consumer Platform Strategy

Abstract

We build an economic model to study the problem of offering a new, high-certainty channel on an existing business-to-consumer platform such as Taobao and eBay. On this new channel, the platform owner exerts effort to reduce the uncertainty of service quality. Sellers can either sell through the existing low-certainty channel or go through additional screening to sell on this new channel. We model the problem as a Bertrand competition game where sellers compete on price and exert effort to provide better service to consumers. In this game, we consider a reputation spillover effect that refers to the impact of the high-certainty channel on the perceived service quality in the low-certainty channel. Counter-intuitively, we find that low-certainty channel demand will decrease as the reputation spillover effect increases, in the case of low inter-channel competition. Also, low-certainty channel demand increases as the quality uncertainty increases, in the case of intense inter-channel competition. Furthermore, the platform owner should offer a new high-certainty channel when (i) the perceived quality for this channel is sufficiently high, (ii) sellers in this channel are able to efficiently provide quality service, (iii) consumers in this channel are not so sensitive to the quality uncertainty, or (iv) the reputation spillover effect is high. In the one-channel case, the incentives of the platform owner and sellers are aligned for all model parameters. However, this is not the case for the two-channel solution, and our model reveals where tensions will arise between parties.