Third-party sellers’ selling formats and advertising competition on e-commerce platforms

Abstract

Many e-commerce platforms allow third-party sellers (manufacturers and retailers) to sell on their websites for commission fees. In particular, manufacturers can sell directly on the platforms (agency selling) or wholesale products to their retailers, who then resell on the platforms (reselling). Competition arises among these downstream sellers. Moreover, manufacturers make pricing and advertising decisions under agency selling, while their retailers make these decisions under reselling, further complicating competition. This study establishes a game-theoretic model that includes two symmetric manufacturers to discuss the interactions between selling formats and sellers’ advertising decisions. Three possible selling modes exist: pure reselling (mode R), pure agency selling (mode A), and hybrid selling (mode H). We find that the equilibrium advertising decisions are different in these selling modes and that product value plays an important role. Specifically, the sellers (i.e., retailers) in mode R always advertise. However, only one seller (i.e., manufacturers) in mode A advertises when the product value is high. In mode H, the manufacturer has a higher profit margin than the retailer and always advertises to leverage this competitive advantage; however, the retailer advertises only when the product value is low. We find that agency selling yields a higher advertising effort than reselling, which may lead to a higher retail price. This finding differs from the traditional wisdom that retail prices in agency selling should be lower because of mitigated double marginalization. Our results demonstrate that agency selling can benefit manufacturers in the presence of advertising competition.