Strategic Contracting and Hybrid Use of Agency and Wholesale Contracts in E-Commerce Platforms

Abstract

This paper examines strategic contracting between a monopoly platform and suppliers that sell their goods through the platform. I consider two competing suppliers: a high-volume supplier with the larger potential demand and a low-volume supplier with the smaller one. Each supplier chooses one of two contracts: wholesale or agency. The platform has to strategically determine the royalty rate for the agency contract by taking into account which contracts the suppliers will choose. I show that the platform offers a low (high) royalty rate to induce the suppliers to adopt the agency (wholesale) contract when product substitutability is low (high) enough. More interestingly, when the degree of substitution is at an intermediate level, asymmetric contracting, in which only the low-volume supplier adopts the agency contract, can arise in equilibrium. This result is related to the fact that many long-tail and niche products with lower potential market sizes are traded on platform-based marketplaces, such as Amazon Marketplace and Walmart Marketplace.