E‐platform finance versus bank finance: pricing, quality design, and competition analysis

Abstract

Some e‐platforms such as Amazon and JD.com are increasingly active in financing business, but theoretical research on this business is not comprehensive enough. This paper uses game theory model to compare the equilibrium of e‐platform financing (EPF) and bank financing (BF) in terms of pricing, quality, suppliers' competition, participants' profits, and consumer welfare. We find that a monopolistic supplier can always enjoy a lower loan interest rate and borrow more loans to improve production quantity or quality under EPF, which benefits to the participants and consumers. Interestingly, the e‐platform provides free loans and only profits from commission fee under some conditions. When there are two suppliers competing for the market share, the absolute advantage of EPF will change. If the supply chain or market environment is bad (production cost or commission rate is high; the potential market or initial budget is low), the e‐platform will offer lower interest rates than bank to reduce the strength gap between the suppliers; thus, the capital‐constrained supplier prefers EPF, which shows that the EPF business is an effective means to regulate upstream competition. However, when there are more competitive suppliers, the preferences of the suppliers with less initial capital are the same as the scenario of the two competitive suppliers, while the preference of the supplier with more initial capital is just the opposite. Finally, if the commission rate is endogenous, we demonstrate that the e‐platform will offer free loans but charge a relatively high commission fee.