Platform vs. Manufacturer: Who should implement innovation in e-commerce supply chains?

Abstract

With increasing investments in technology innovations, such as artificial intelligence and augmented & virtual realities, e-commerce grows faster than ever before. In this paper, we analyze two innovation strategies: one is manufacturer innovation in which the manufacturer implements innovation; and the other is platform innovation in which the electronic retailer implements innovation. Moreover, we propose two types of e-commerce business structures which are widely adopted in reality: one is reselling structure in which the electronic retailer buys products from the manufacturer and resells them to consumers; the other is agency selling structure in which the manufacturer directly sells products to consumers through the platform by paying a commission fee. A theoretical model is developed to compare the above four scenarios. Our results show that under reselling structure, when platform innovation is as efficient as manufacturer innovation, manufacturer innovation achieves higher profit for both supply chain players, which implies that policy makers can encourage manufacturer innovation by providing incentive mechanisms. Whereas under agency selling, the impact of innovation efficiency on firms’ profit depends on the platform’s commission rate. Moreover, the manufacturer is more likely to benefit from platform innovation than the electronic retailer, and the electronic retailer is better off under agency selling.