Contract selection of platform selling under spillovers from offline to online sales

Abstract

More and more retailers have established their own online channels (such as Apps, WeChat applets and official websites) in addition to their offline channels (physical stores). Moreover, some of them also try to sell their products through the third-party platforms (e-tailer platforms such as Amazon, Taobao and JD). Two common agency fee contracts are offered by the third-party platform to the retailer: the revenue sharing contract where the platform shares a portion of the retailer's revenue, and the fixed fee contract where the retailer needs to pay a fixed rent for each sale. This paper establishes a model where a retailer sells products through an offline channel, an online channel and a third-party platform channel which provides two different agency contracts. A spillover effect is considered to capture the interaction between the offline channel and the online channel. We investigate the optimal pricing decisions of the retailer and contract preference of both the retailer and the third-party platform. We find that the retailer prefers revenue sharing contract to the fixed fee contract. However, when the degree of competition among channels is very low, the third-party platform is not willing to offer revenue sharing contract. Moreover, we find that the third-party platform prefers the fixed fee contract when both contracts generate profits.