Can an E-commerce Platform and its Third-Party Sellers Benefit From Each Other’s Market Entry?

Abstract

Due to the informational advantage of E-commerce platforms over their third-party sellers, there is a common belief that a platform's market entry will be detrimental to third-party sellers who sell similar products on the platform. However, unlike traditional retail competition, the platform and its sellers have aligned incentives: the platform's commission depends on the seller's revenue, and sellers rely on the platform to strengthen their online presence. Hence, the platform has no incentive to enter the market to harm the seller's revenue severely. These observations cast a doubt over this common belief. In this paper, we first present a duopoly model in which the seller is the "incumbent'' and the platform is the "potential entrant''. Our model captures two salient features: (a) the "reputation effect'' that enables the platform to obtain a higher consumer valuation than the seller, and (b) the "spillover effect'' that expands the market size when an additional entity (e.g., the platform) enters the market. Our equilibrium analysis debunks this belief: a platform's entry can enable the platform and the seller to obtain a higher profit when the unit cost is moderate, the reputation effect is moderate, and the spillover effect is sufficiently high. As a robustness check, we also examine an alternative duopoly model with "reversed roles'': the platform is the incumbent whereas the seller is the potential entrant. By incorporating the same reputation and spillover effects, we find a consistent result: the seller's entry can benefit both parties under similar market conditions. Essentially, these favorable conditions foster a symbiotic relationship so that both the platform and sellers can actually benefit from each other's entry.

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