Implications of platform ecosystems on manufacturers’ selling model selection

Abstract

Several major manufacturers, such as Apple and Xiaomi, have evolved into platform-based companies. They not only produce hardware products but also develop platform ecosystems that connect hardware product users and software developers. However, the existing literature rarely explores how the establishment of platform ecosystems affects the manufacturer’s optimal selling model choice. We consider a monopolistic manufacturer that establishes a platform ecosystem, generating revenue from both hardware sales and software developer access fees (service price). Furthermore, the manufacturer can choose the direct selling, reselling, and agency selling to distribute the hardware products. We primarily examine the impacts of establishing a platform ecosystem on hardware product pricing, profitability, and supply chain efficiency in different selling models. Our theoretical analysis first reveals that establishing a platform ecosystem, driven by cross-side network effects, can contribute to the reduction of hardware product prices. This incentive to lower prices is strongest under the agency selling, followed by the direct selling, and then the reselling. Second, compared with the scenario without a platform ecosystem, establishing a platform ecosystem will expand the manufacturer’s preference for agency selling over reselling. Third, the platform ecosystem can improve supply chain efficiency in reselling under a certain condition. However, agency selling consistently decreases in efficiency. Furthermore, contrary to traditional wisdom, when the commission rate is high and the cross-side network effect is low, supply chain efficiency under reselling surpasses that under agency selling. Last, we extended the model and reveal that consumers’ privacy concerns and the negative reverse network effect expand the region where agency selling dominates, while nonzero costs (production and service costs) and channel competition reduce this region.