To compete or to take over? An economic analysis of new sellers on e-commerce marketplaces

Abstract

The rise of e-commerce has inspired entrepreneurs to start their businesses online. E-commerce platforms, such as eBay, Amazon Marketplace, and Taobao, feature low barriers of entry to their sellers, as there is very low cost involved in entering an online marketplace and becoming a seller. In the meantime, we observe that many sellers choose to incur a much higher cost and enter the marketplace by taking over an existing seller’s account. We identify an interesting problem faced by entrants to online marketplaces: should they enter as new or should they take over another seller? Entrants’ decisions are complicated by several factors, including the reputation of the existing seller, the entrant’s capability, and the information asymmetry between the entrant and the incumbent. We develop an economic model to study the interactions between an entrant and an incumbent in an e-commerce marketplace. We discover that reputation plays an important role in the entrant’s competition-takeover decision. Our findings carry useful insights for e-commerce platforms in understanding the impact of entrants on the existing community of sellers.