The fulfillment service in online marketplaces

Abstract

In recent times, fulfillment services in online marketplaces have witnessed a surge in popularity. Dominant e-commerce platforms, such as Amazon.com, now allow small retailers to join their online marketplaces, while concurrently providing comprehensive fulfillment services. In return, small retailers pay a fulfillment fee per unit of sales. We examine the advantages of these fulfillment programs in the context of a dominant retailer that possesses an online marketplace, alongside a small retailer who operates within this marketplace and possesses private fulfillment cost information. We analyze two scenarios, contingent upon the presence or absence of competition between the two retailers, and we derive the optimal fulfillment fees for the dominant retailer. Our findings indicate that the structure of market competition plays a pivotal role in shaping fulfillment fees and associated advantages. In the absence of market competition, the provision of fulfillment services consistently proves advantageous. This is attributed to enhancements in (1) consumer valuation of the small retailer's products and (2) overall system efficiency in fulfillment. Conversely, when there is competition, offering a fulfillment program may not be as lucrative if the improvements in product valuation and the degree of cost heterogeneity are minimal. Furthermore, our findings highlight that enhancements in product valuation can positively impact both retailers and consumer welfare, irrespective of market competition. However, in cases where cost heterogeneity arises due to asymmetric information, it may adversely affect consumer welfare in the absence of competition.