Equilibrium analysis of the seller’s fulfillment channels and sales channels

Abstract

Sellers’ products can be sold either through platform channels or through their own channels. Also, sellers’ orders can either be fulfilled by platforms (FBP) or be fulfilled by third-party merchants (FBM). We consider a platform and a representative seller that compete in selling two substitutable products. We develop an analytical framework for identifying each firm’s structure preference by comparing four modes: own channel with FBP (Mode OP), own channel with FBM (Mode OM), platform channel with FBP (Mode PP), and platform channel with FBM (Mode PM). Our research establishes several insights. When the seller’s products are sold through either his own channel or the platform channel with a commission rate, the platform always prefers to provide fulfillment services for the seller – who may be unwilling to accept that service. In contrast, when the seller’s products are sold through the platform channel with a commission rate, the platform has more incentive to “protect” the seller’s profit by offering (resp. not offering) fulfillment services to him when he prefers FBP (resp. FBM). These outcomes indicate that the likelihood of platform and seller agreeing on a fulfillment channel for the seller’s orders is strongly affected by the commission rate and the seller’s sales channel. Besides, even though the platform is always willing to provide sales channels for the seller, a seller’s acceptance of that offer is influenced by his own fulfillment channels. Finally, our analysis reveals that the only possible win–win equilibrium structures for the platform and the seller are Mode PP and Mode PM.