Implications of selling format on product innovation in platform supply chains under asymmetric information

Abstract

This paper studies the implications of selling format in a platform supply chain where a manufacturer implements product innovation activities and has private information about its innovation effectiveness. Two widely adopted formats are considered: reselling and agency selling, regarding the platform acting as an online reseller or marketplace, respectively. A theoretical model is developed to explore innovation and pricing decisions. In information asymmetry, the manufacturer may signal its effectiveness to the platform in the reselling format. Whether a separating or pooling equilibrium is achieved depends on the signaling cost resulting from the downward distortion of wholesale price and innovation decisions. Our findings reveal that in separating equilibrium innovation may be fully abandoned under certain conditions. In the agency selling format, information asymmetry cannot affect the decision-making. Moreover, a relatively low commission fee leads to a higher innovation level in the agency selling than in the reselling format, and a medium fee yields a win–win outcome in the agency selling for chain members. Comparison of supply chain efficiency shows that only when the commission rate and innovation effectiveness are high enough will the agency selling format be less efficient than the reselling format.