Contract and product quality in platform selling

Abstract More and more e-tailers (platforms) are allowing manufacturers direct access to customers. Two common contracts are offered by platforms to manufacturers: the revenue sharing contract where a platform appropriates a portion of the manufacturer’s revenue, and the fixed fee contract where a platform charges a fixed rent for each sale. Using an analytical model, this paper studies the interrelationship between a platform’s contract choice and a manufacturer’s product quality decision. We find that if product quality is exogenously given, the platform will always adopt the revenue sharing contract. If the manufacturer endogenously decides the quality, however, the platform’s contract choice may be changed. This is because the revenue sharing contract, compared to fixed fee, leads to a lower selling price of the manufacturer, whereas the fixed fee contract can motivate a higher quality than does revenue sharing. As a result, a large (small) market heterogeneity induces the platform to adopt the revenue sharing (fixed fee) contract. We also extend the model to several directions, finding that longer product line, manufacturer competition, lower marginal production cost, and higher platform cost all tend to induce the platform to put forward a fixed fee contract; while if quality decision is less flexible than contract decision, the platform is more ready to embrace revenue sharing. Besides, when there are two platforms competing for the same market, they should differentiate their contract choices so as to mitigate competition.

[1]  J. Ryan,et al.  Competition and Coordination in Online Marketplaces , 2012 .

[2]  M. Armstrong Competition in Two-Sided Markets ¤ , 2005 .

[3]  Preyas S. Desai Quality Segmentation in Spatial Markets: When Does Cannibalization Affect Product Line Design? , 2001 .

[4]  Panagiotis Kouvelis,et al.  Quality-Based Competition, Profitability, and Variable Costs , 2006, Manag. Sci..

[5]  Qihui Lu,et al.  Who benefit from agency model: A strategic analysis of pricing models in distribution channels of physical books and e-books , 2018, Eur. J. Oper. Res..

[6]  B. Mantin,et al.  The Strategic Role of Third-Party Marketplaces in Retailing , 2014 .

[7]  D. Kuksov Buyer Search Costs and Endogenous Product Design , 2004 .

[8]  Kinshuk Jerath,et al.  Agency Selling or Reselling? Channel Structures in Electronic Retailing , 2015 .

[9]  K. Moorthy,et al.  Product and Price Competition in a Duopoly , 1988 .

[10]  Jianqing Chen,et al.  Platform or Wholesale? A Strategic Tool for Online Retailers to Benefit from Third-Party Information , 2013, MIS Q..

[11]  Massimo Motta,et al.  Endogenous Quality Choice: Price vs. Quantity Competition , 1993 .

[12]  J. M. Villas-Boas Product Line Design for a Distribution Channel , 1998 .

[13]  Rajeev K. Tyagi,et al.  Do Strategic Conclusions Depend on how Price is Defined in Models of Distribution Channels? , 2005 .

[14]  Liang Liang,et al.  Price and quality decisions in dual-channel supply chains , 2017, Eur. J. Oper. Res..

[15]  J. Miguel Villas-Boas,et al.  Communication Strategies and Product Line Design , 2004 .

[16]  S. Rosen,et al.  Monopoly and product quality , 1978 .

[17]  Xavier Wauthy,et al.  Quality choice in models of vertical differentiation , 1996 .

[18]  Kannan Srinivasan,et al.  Firm Strategies in the 'Mid Tail' of Platform-Based Retailing , 2010, Mark. Sci..

[19]  Hongyan Shi,et al.  Consumer Heterogeneity, Product Quality, and Distribution Channels , 2013, Manag. Sci..

[20]  Christine B. Bucklin,et al.  Channel Conflict: When Is It Dangerous? , 1997 .

[21]  Xiaowei Xu,et al.  Optimal Price and Product Quality Decisions in a Distribution Channel , 2009, Manag. Sci..

[22]  Qiying Hu,et al.  Price and quality-based competition and channel structure with consumer loyalty , 2017, Eur. J. Oper. Res..

[23]  R. Staelin,et al.  Vertical Strategic Interaction: Implications for Channel Pricing Strategy , 1997 .

[24]  Yan Liu,et al.  Optimal quality and quantity provisions for centralized vs. decentralized distribution: Market size uncertainty effects , 2018, Eur. J. Oper. Res..

[25]  Jun Zhang,et al.  Impacts of Power Structure on Supply Chains with Uncertain Demand , 2013 .

[26]  Andrei Hagiu,et al.  Marketplace or Reseller? , 2014, Manag. Sci..

[27]  S. C. Choi,et al.  Price Competition in a Channel Structure with a Common Retailer , 1991 .

[28]  Steven M. Shugan,et al.  Managing Channel Profits , 2008, Mark. Sci..

[29]  Nicholas Economides,et al.  Quality Choice and Vertical Integration , 1997 .