Strategic introduction of the marketplace channel under dual upstream disadvantages in sales efficiency and demand information

Highlights

• We study whether the marketplace channel should be introduced in online retailing.

• We consider dual upstream disadvantages in demand information and sales efficiency.

• We show the two disadvantages exert effects in opposite direction.

• We demonstrate “win–win–win” areas for the manufacturer, the e-tailer and consumers.

• We find a low-efficiency manufacturer will suffer longer from poor information.

Abstract

The increasing prevalence of online retailing has recently given rise to a novel marketplace channel, in which upstream manufacturers can sell their products directly to consumers by paying a fee to e-tailers. While it endows upstream manufacturers with direct access to consumers, it also requires them to personally perform sales work, which is not their strength, especially in the form of sales efficiency and demand information. In this paper, we apply a stylized theoretical model to examine whether the manufacturer and e-tailer should agree to introduce the marketplace channel by considering these dual upstream disadvantages. We present an interesting insight that the marketplace channel should be introduced under not only a low degree but also a high degree of upstream sales inefficiency, which also means that a weak direct channel would not necessarily become a burden for the two. Actually, here, its introduction leads to higher output, a lower wholesale price and a lower retail price, thus benefiting both the supply chain members and the overall economy. In contrast, we find that only when the upstream informational disadvantage is moderate can the two reach consensus and introduce the marketplace channel. These findings, counterintuitively, demonstrate the entirely different effects of two types of upstream disadvantage in the equilibrium channel structure. Further, we also illustrate how the manufacturer’s two disadvantages interact with one another; a manufacturer with higher sales efficiency can screen information early, while a manufacturer with low sales efficiency has to suffer longer from poor demand information.

Introduction

Online platform sales have witnessed strong growth in the past decade. For instance, in China, which experienced the largest scale and highest rate of growth in online retailing, sales were reported to be 3.2 trillion RMB in 2015, accounting for 11% of total retail sales (Sun, 2016, Yan, Zhao, Liu, 2018). In addition to the increasingly widespread use of online sales, a novel online channel—the marketplace—has emerged, which provides upstream manufacturers with direct access to online consumers in exchange for a fee. Thus far, the marketplace has been widely adopted by Amazon and Sears, JD.COM and Taobao in China (Bonfils, 2012), and Flipkart in India (Tiwari, 2014). Specifically, for Amazon, the largest e-tailer worldwide, sales in the marketplace had accounted for approximately 40% of total transactions (Barr, 2012), up from 30% in 2009 (Stone, 2009). Further, Huang, the CFO of JD.COM, also claims that the marketplace has become substantially profitable for JD.COM, improving its gross profit margin by 4.3%. As JD.COM’s sales volume in the marketplace had increased rapidly to 46% by the fourth quarter of 2015, the marketplace channel has become nearly as important as the traditional reseller channel (Panshizhixin, 2016).

In general, relative to the traditional reseller channel, in which the manufacturer sells products to the e-tailer that then sells to end consumers, a considerable benefit of the novel marketplace channel is that it provides upstream manufacturers with direct access to end consumers (Abhishek, Jerath, & Zhang, 2015), which is helpful for these manufacturers to adjust downstream competition and product output. However, it also gives rise to other problems. The most important of these is that, in contrast to the conventional reseller channel, in which manufacturers can relegate sales work to the e-tailer, in the marketplace channel, manufacturers are responsible for such work, which is not their strength. Moreover, in practice, upstream manufacturers’ disadvantages relative to e-tailers often manifest in many ways, especially in sales efficiency and demand information (Li, Gilbert, & Lai, 2013).

First, in the real world, upstream manufacturers are often week in sales efficiency, akin to the e-tailer’s disadvantage in production. This inefficiency may stem from manufacturers’ lower level of experience and inferior knowledge of customer preferences or from the lack of economies of scope with other retailing activities (Arya, Mittendorf, Sappington, 2007, Li, Gilbert, Lai, 2013, Li, Gilbert, Lai, 2015). Huang, the CFO of JD.COM, also confirms the e-tailers’ increased scale economy, such as in the logistic transportation network, which constantly improves the sales efficiency of JD.COM relative to the upstream manufacturers (Tencent, 2017). Second, as shown in the United States, Japan and some European countries, upstream manufacturers often have less knowledge of market potential than do e-tailers, which are closer to online customers, as a result of the latter’s better expertise and superior forecasting ability in the selling process, as well as rich first-hand sales data (Gao, Woetzel, Wu, 2003, Niu, Wang, Guo, 2015). For instance, Amazon has data from the sales of millions of products and can use these data to identify product potential (Jiang, Jerath, & Srinivasan, 2011). These upstream disadvantages would appear to reduce the manufacturer’s willingness of introducing a marketplace channel, and then become another major factors that must be considered in determining the downstream channel structure.

In this paper, from the perspective of the aforementioned dual upstream disadvantages of sales efficiency and demand information, we attempt to examine strategies related to the introduction of the marketplace channel for manufacturers, retailers and consumers. The specific research questions are as follows. First, how does the upstream manufacturer’s disadvantage in sales efficiency affect the introduction of the marketplace channel? Will it actually diminish manufacturers’ incentive to introduce this channel and increase that of the retailer? Second, how does the upstream manufacturer’s disadvantage in demand information affect the equilibrium channel structure? Will the two types of upstream disadvantage exert effects in the same direction? Third, do the manufacturer’s two disadvantages in demand information and sales efficiency interact with one another and, if so, how? Fourth, under the combined effects, what are the outcomes for the manufacturer, the e-tailer and the consumer?

To capture the aforementioned issues, we develop a model in which a manufacturer (she) cooperates with an e-tailer (he) to sell her products to online consumers through the marketplace channel in addition to the conventional reseller channel. Based on this framework, to incorporate the influence of asymmetric information, we assume that the manufacturer knows only the prior distribution of the demand state, while the e-tailer knows the exact realization. Furthermore, we explore the impact of this asymmetric sales efficiency by assuming that the manufacturer pays a selling cost when she directly sells one product through the marketplace channel. Then, two primary cases will be analyzed: one in which the marketplace channel is not introduced and another in which the marketplace channel is introduced. Additionally, for the case in which the marketplace channel is introduced, considering a multistage asymmetric information game between the manufacturer and e-tailer, we also present and study two methods of information transmission. After deriving the equilibrium solutions of these cases, we obtain some novel management insights.

First, we find the introduction of the marketplace channel will be an equilibrium strategy under both a high level and a low level of upstream sales efficiency. Given high sales efficiency in the marketplace channel, the manufacturer is endowed with an efficient approach to control downstream output, which avoids the e-tailer obtaining a monopoly; the e-tailer is derives profits from charging a platform fee. Moreover, given low sales efficiency, we counterintuitively find that such a weak channel would not necessarily become a burden for the two. The manufacturer will reduce the wholesale price to encourage the e-tailer to sell more through the efficient reseller channel; the e-tailer will order more due to his fear that the manufacturer will sell too much through the weak marketplace channel. They jointly emphasize improving the performance of the strong reseller channel, thus causing a Pareto improvement.

Second, we find that, in the face of informational disadvantage, the manufacturer will attempt to infer the true demand from the e-tailer’s order; this information transmission will reduce the e-tailer’s profit gained from private information and instead increase the manufacturer’s profit. Consequently, only when the information value is not too high or too low, i.e., the e-tailer’s loss and the manufacturer’s benefit are both acceptable, can they reach consensus and introduce the marketplace. Interestingly, the first and second insights demonstrate entirely different effects of the two types of upstream disadvantage; the marketplace will be introduced when the efficiency disadvantage is pronounced or slight but when the informational disadvantage is moderate.

Third, we illustrate how the manufacturer’s two disadvantages interact with one another; a manufacturer with higher sales efficiency can improve her ability to identify information early, while a manufacturer with poor sales efficiency has to suffer longer from poor demand information. Given a low selling cost, the manufacturer will screen initially. Here, she infers demand early and then makes decisions that are better suited to the market, while she has to undertake more retailing work because the low-type e-tailer is priced out through the wholesale price. As the selling cost increases, the manufacturer would prefer not to engage in substantial direct retailing. Thus, she initially has to pool to ensure participation by either type of e-tailer and postpone identifying the demand information.

Fourth, we find that the introduction of the marketplace channel has a surprising positive impact, not only on the profits of the manufacturer and e-tailer but also on consumer welfare when the selling cost is sufficiently high or low and the information value is moderate. Here, through the addition of another channel, total output will increase to a more appropriate level, which can lead to higher total profits; the wholesale price also decreases, thereby improving the profit distribution between the manufacturer and the e-tailer. These symbiotic effects lead to a “win–win–win” outcome for the manufacturer, e-tailer and consumers.

The remainder of this paper is organized as follows. In Section 2, we briefly review the related literature. In Section 3, we set up the model. In Section 4, we study the manufacturer’s and e-tailer’s optimal decisions in the absence and presence of the marketplace. In Section 5, we present the equilibrium strategies. In Section 6, we explore the impact of introducing the marketplace on the consumer surplus. In Section 7, we study the impact of the fee rate and derive the optimal platform fee. In Section 8, we extend our results by altering some assumptions in the model. In Section 9, we conclude the paper with a brief discussion.