Seller Diversity on a Two-Sided Platform

Abstract

The growth of online marketplaces is accompanied by significant heterogeneity of the third-party sellers. The marketplace owner often applies policies that favor the sellers who offer higher values to buyers, which puts the lower-value sellers at an even greater disadvantage. This leads to the phenomenon of Matthew Effect. Our study focuses on a marketplace owner’s policy in managing seller heterogeneity and analyzes Matthew Effect in a competitive market environment. By extending the circular city model, we analytically examine the price competition among a large number of sellers that differ both in variety and in their value offerings. We present the closed-form equilibrium solution for the sellers’ pricing strategies, which illustrates the ripple effect that exerts competitive pressure from seller to seller at a diminishing magnitude. Furthermore, we show that, by providing each seller with the support that enhances its value offering proportionally, the marketplace owner further sharpens seller heterogeneity and creates Matthew Effect. This results in an increased profit for the marketplace owner and improved consumer surplus. The optimal level of such value-based support is dependent on the distribution of the sellers’ values and the buyers’ horizontal preferences. Our findings suggest that Matthew Effect improves social welfare by increasing the total profits of sellers and the marketplace owner, as well as the consumer surplus; moreover, it creates business opportunities for new sellers in the online marketplace.