The interactions between upstream quality disclosure and downstream entry

Abstract

Currently, an increasing number of online platforms are entering retail markets, sharing a common manufacturer with traditional retailers. This study focuses on the platform entry strategy in a supply chain, where a manufacturer that could voluntarily disclose quality information sells its product via a retailer. Two common distribution contracts (reselling and agency selling) between the manufacturer and the online platform are considered. We find that downstream entry induces the manufacturer to reveal more quality information to the consumer than in the monopoly setting and that the agency contract results in a higher (lower) transparency level of the supply chain than the reselling contract when the commission fee is small (large). Moreover, contrary to the conventional wisdom that downstream entry likely harms incumbent retailers, we show that entry is not necessarily a problem that harms existing traditional retailers due to the increased quality transparency caused by entry. It is generally believed that a higher commission fee may encourage the platform to adopt the agency contract. In contrast, we demonstrate that the platform does not always benefit from a higher commission fee when an agency selling contract is adopted; the platform still chooses a reselling contract to enter the market in a context with asymmetric quality information, despite the higher commission fee. That is, the manufacturer’s quality disclosure can create a new win-win outcome for the platform and manufacturer in the choice of distribution contract.