Sourcing Channel Decision in the Presence of Platform Encroachment with Quantity Competition

Abstract

The decision of sourcing channels is a critical strategy for online retail platforms (ORs) when they encroach into the product market of the third-party retailers (3PRs). Whether the products of the OR are provided by the common supplier or the one different from that of the 3PR leads to different supply chain structures. This paper focuses on the sourcing channel decision of an encroaching OR given the sourcing channel of a 3PR. The OR may source either from the common supplier, i.e., the same supplier as that of the 3PR, or from a different supplier, i.e., one different from that of the 3PR. This paper develops two game-theoretical models to examine the sourcing channel decision of an OR in quantity competition with a 3PR on the platform. The results show that the OR’s preference for the sourcing channel is significantly affected by the production cost, product substitutability and commission rate. By comparing the performances of the OR under these two sourcing channels, we find that when the production cost of the different supplier is very low, or when the product substitutability of the different supplier is low, or when the commission rate is either very low or very high, the OR prefers to source from the different supplier. Otherwise, the OR tends to source from the common supplier. We also find that the OR’s encroachment into the sales market of a 3PR by sourcing from the common supplier will always hurt the 3PR, but the platform encroachment by sourcing from the different supplier will not necessarily hurt, especially when the supplier selected by the OR has a significant disadvantage in production cost compared to those of the 3PR. Furthermore, when the OR encroaches by sourcing from the common supplier, it becomes the largest retailer in the market; otherwise, the 3PR is the largest retailer in that market. Our results also indicate that platform encroachment by different sourcing can not only expand the sales market, but also weaken the negative effects of platform encroachment on the profit of the 3PR.