National or third-party manufacturer? Sourcing strategy of a dominant platform: Signaling game's perspective

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The dominant online platforms (e.g., Amazon and JD) in practice have adopted a strategy of introducing their own store brands as a means to engage in competition with national brands inside consumer markets. However, whether to source store brands from national or third-party manufacturers is still a dilemma for platforms. This paper investigates the online platform's optimal sourcing decision for the store brand when the platform possesses private information about the degree of consumer acceptance of the store brand. This paper develops a signaling game in which the better-informed dominant-platform may reveal its private information through profit margins and highlight the signaling effect of price on the sourcing strategy. Due to the signaling cost, we find that asymmetric information has the potential to inhibit the platform from cooperating with the national manufacturer to produce the store brand. Furthermore, the existence of information asymmetry reduces the profit of the platform with superior information, while simultaneously boosting the profit of the less-informed national manufacturer. Interestingly, our findings reveal that under an asymmetric information setting, a higher level of information asymmetry might negatively impact the platform, which contrasts with the situation when information is symmetric. Consequently, the platform gains more advantages by cooperating with a third-party manufacturer with a moderate level of information asymmetry.