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Competitor referral by platforms

  • S.I.: Information- Transparent Supply Chains
  • Published:
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Abstract

Online platforms provide sellers’ products on their websites and earn a commission fee for each unit sold. Recently, many platforms have tried to refer customers to their direct competitors. In this paper, we explain this counter-intuitive practice by developing a game-theoretic model where two competing platforms contracting with one common seller or two competing sellers. We first analyze a benchmark case where platforms and sellers are integrated, finding that competitor referral will aggregate competition and thus neither platform is willing to refer its competitor voluntarily. However, when each platform serves as a marketplace for an independent seller, it is possible that a platform voluntarily refers its competitor. The rationale is that there exists a double marginalization problem when platforms set commission fees and sellers set prices, resulting in low efficiency of product selling. By referring visitors to their competitors, platforms can introduce cannibalization to cope with the double marginalization problem. We also investigate the case when the two platforms serve one common seller, finding that as long as the seller does not charge discriminated prices for the same product, the platforms may also apply referral. This is because the benefits of the two platforms are more aligned when the common seller sets a common price. Thus, online referral which helps the competitor may also help the referring platform itself. This paper also makes serval extensions to check the robustness of the model.

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Notes

  1. There are two ways to model the commission fee in the literature: a fixed commission (our paper, Jiang et al. 2011; Mantin et al. 2014; Hagiu and Wright 2015) and a revenue sharing commission (Ryan et al. 2012; Abhishek et al. 2016; Kwark et al. 2017). When there is competition and commission fee is endogenously chosen, researchers often use the fixed commission model rather than the revenue sharing model, simply because the latter is too complicated to obtain analytical solutions. However, as discussed in (Mantin et al. 2014), the two commission forms influence prices toward the same direction, and thus the results do not qualitatively change if we use the revenue sharing model.

  2. A comparison between the benchmark and the two-seller format reveals that the role of competitor referral critically interplays with the vertical relationship in a platform context.

  3. As will be shown in the extensions, if competitor referral is not 100% perfect, in equilibrium the two platforms may simultaneously refer each other.

  4. Note that this indirect effect does not exist under DP where the seller can always benefit from referral by simply charging a high price on the referring platform whilst charging a low price on the referred platform. Under this circumstance, the referring platform would not be more powerful when contracting with the seller.

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Acknowledgements

This work is supported by the National Natural Science Foundation of China [Grants No. 71972173, No. 71801206, No. 71520107002] and USTC Research Funds of the Double First-Class Initiative (YD 2040002004).

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Authors and Affiliations

  1. School of Business, Jiangsu Normal University, Xuzhou, 221009, China

    Jianqiang Zhang

  2. International Institute of Finance, School of Management, University of Science and Technology of China, Hefei, 230026, China

    Qingning Cao

  3. Belk College of Business, University of North Carolina at Charlotte, Charlotte, NC, 28223, USA

    Xiuli He

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  1. Jianqiang Zhang
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  2. Qingning Cao
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Correspondence to Qingning Cao.

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Zhang, J., Cao, Q. & He, X. Competitor referral by platforms. Ann Oper Res 329, 757–780 (2023). https://doi.org/10.1007/s10479-021-04020-4

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