Product distribution strategy in response to the platform retailer's marketplace introduction

Abstract

An increasing number of online retailers (e.g., Amazon.com and JD.com) who are established as pure resellers are providing marketplace services allowing suppliers to directly sell products to consumers. These platforms’ hybrid roles of resellers and marketplaces make it possible for suppliers to distribute vertically differentiated products through the reselling or the marketplace channel. However, the suppliers’ product distribution choices are affected by the platforms’ marketplace introduction decisions, which is largely neglected in previous research. To investigate such interactions, this paper develops a game model where a supplier sells low- and high-end products through a platform retailer. The supplier makes the product distribution decision in response to the retailer's marketplace introduction choice. Our analysis shows that the game equilibrium is affected by the product differentiation level and the order-fulfillment fee charged by the retailer. First, the retailer prefers to offer the marketplace service when the order-fulfillment fee is relatively high. Second, we derive conditions under which each of the four distribution modes (pure reselling, pure marketplace, and two hybrid selling modes with different products selling in different channels) emerges in equilibrium. We disclose that the pricing right and the strategic use of the double marginalization from reselling play critical roles in the equilibrium results. Our main results highlight the importance for platform-based retailers to consider suppliers’ strategic product distribution responses when opening their platforms.