Can an E-commerce Platform and its Third-Party Sellers Benefit From Each Other’s Market Entry?

Abstract

E-commerce platforms have an informational advantage over their third-party sellers, leading to the common belief that a platform's market entry would harm sellers with similar products. However, unlike traditional retail competition, the platform and its sellers have aligned incentives: the platform's commission depends on the seller's revenue, and sellers rely on the platform to strengthen their online presence. Hence, the platform has no incentive to enter the market to harm the seller's revenue severely. This paper introduces a duopoly model where the seller is the "incumbent" and the platform is the "potential entrant". Our model captures two salient features: (a) the "reputation effect" that enables the platform to obtain a higher consumer valuation than the seller, and (b) the "spillover effect" that expands the market size when an additional entity (e.g., the platform) enters the market. Our equilibrium analysis debunks the prevailing belief about platform's entry, showing that platform's entry can enable both the platform and the seller to obtain a higher profit when the unit cost is sufficiently low and the spillover effect is sufficiently high. For robustness checks, we consider three different extensions: an alternative duopoly model with reversed roles where the platform is the incumbent and the seller is the potential entrant, a scenario with an endogenously determined spillover effect, and a simultaneous market entry/exit decision-making process. We find a consistent result across all three extensions that both seller and platform entries can mutually benefit under similar market conditions, fostering a symbiotic relationship.