Developing a store brand or collecting a commission: Amazon's choice and quality decision

Abstract

AbstractAmazon, as one of the dominant online retailers (platforms), cooperates with manufacturers under wholesale contract to develop its store brands. Simultaneously, Amazon offers manufacturers with a marketplace and serves manufacturers in the agency selling. In this paper, we build a model to investigate the platform's and the manufacturer's choices on the cooperation modes (i.e., wholesale contract or agency selling) and their quality decisions when they serve consumers with heterogeneous willingness to pay for quality and the platform can dictate the quality under the wholesale contract. We find that the platform and the manufacturer are more likely to align their preferences on selling modes when consumers are homogenous enough. Moreover, when the commission rate is relatively low, both of them may prefer the agency selling. In this case, the manufacturer is willing to offer high quality in the agency selling. In contrast, when the commission rate is sufficiently high, they can only align their preferences on selling modes by choosing the wholesale contract. The product quality under the wholesale contract is higher than that in the agency selling. Finally, we provide three extensions: the platform decides the commission rate, the platform decides the wholesale price and competition between manufacturers.