Impacts of the minimum quantity contract on an online retail platform

Abstract

With the rapid development of e-commence, online shopping festivals have become increasingly important as sales drivers of online retail platforms in recent years. In online shopping festivals, selection of the selling format is a key strategy for the suppliers. In this paper, we develop a model to analyze a supplier selling its products to loyal consumers and general shoppers through an online retailer platform who offers either the marketplace or reselling mode or both modes. We characterize the supplier’s optimal selling format selection under the minimum quantity contract in different market structure settings. We find that when the platform offers at most one mode, the supplier should select the marketplace mode under a low minimum quantity contract to avoid the double marginalization effect of the reselling mode. If the minimum quantity contract in the marketplace mode is relatively high, the supplier should select the reselling mode under a low minimum quantity contract. When the platform offers both modes, the supplier’s optimal selling format selection depends on the market structure. When the potential market of the loyal consumers is sufficiently small, even if the platform allows the supplier to use both modes, the supplier tends to choose only one platform mode to avoid channel competition. The more loyal consumers there are, the more willing the supplier will use both modes for larger potential market. Finally, we discuss the managerial implications for the supplier and platform in selecting the selling format and setting the minimum quantity contract, respectively.