Competition and Coordination in Online Marketplaces

TLDR

Online marketplaces such as Amazon have rapidly expanded, acting as intermediaries that match buyers and sellers while leaving product control to sellers, yet the marketplace operator sometimes sells competing goods itself, creating potential channel conflict. This article investigates the channel conflict arising when a marketplace owner sells competing products and examines whether a retailer should sell through the marketplace and at what price. The authors model a retailer that can choose to contract with a marketplace, weighing expanded market access against participation costs, and analyze the resulting equilibrium decisions of both retailer and marketplace.

Abstract

Online marketplaces, such as those operated by Amazon, have seen rapid growth in recent years. These marketplaces serve as an intermediary, matching buyers with sellers, whereas control of the good is left to the seller. In some cases, e.g., the Amazon marketplace system, the firm that owns and manages the marketplace system will also sell competing products through the marketplace system. This creates a new form of channel conflict, which is a focus of this article. We consider a setting in which a marketplace firm operates an online marketplace through which retailers can sell their products directly to consumers. We consider a single retailer, who currently sells its product only through its own website, but who may choose to contract with Amazon to sell its product through the marketplace system. Selling the product through the marketplace expands the available market for the retailer, but comes at some expense, e.g., a fixed participation fee or a revenue sharing requirement. Thus, a key question for the retailer is whether she should choose to sell through the marketplace system, and if so, at what price. We analyze the optimal decisions for both the retailer and the marketplace firm and characterize the system equilibrium.