Spillover Effect of Consumer Awareness on Third Parties' Selling Strategies and Retailers' Platform Openness

Abstract

In this study, we explore why an online retailer would open its platform and why a third-party seller would join the platform when the third party carries products identical to those the retailer sells as well as products the retailer does not carry. When the third party joins the retailer's platform, more consumers become aware of the third party's existence, and thus might become aware of the products it does not list on the retailer's platform (e.g., by searching the seller brand online), which is called the spillover effect. We develop a game-theoretic model to first examine the spillover effect on the third-party seller's product offering on the retailer's platform under an exogenous commission rate and then examine the effect on the retailer's platform-openness decision. We find that the third party's optimal selling strategies vary with its initial awareness level, the extent of the spillover effect, and the commission rate. Furthermore, we characterize how the initial awareness level and the extent of the spillover effect together determine the retailer's openness decision and equilibrium selling partnership. When the spillover effect is mild, the retailer opens its platform and the third-party seller sells its exclusive product on the platform. When the spillover effect is salient, if the retailer has a large awareness advantage over the third party, the retailer has no incentive to open; otherwise, the retailer opens its platform and the third party sells the identical product on the platform. Finally, we find that, compared to the case without a spillover effect, the spillover effect makes the retailer less likely to open its platform, but it makes the third party more likely to sell identical products on an open retailer platform; the spillover effect always (weakly) benefits the third party, but it does not necessarily hurt the retailer.