Channel Choice via On-line Platform

Several major on-line platforms operate two channels: an agency channel in which suppliers retain control over prices and quantities and pay a portion of sales revenue to the platform, and a reselling channel in which the platform purchases goods from the supplier and resells them to consumers. These two channels run in parallel and many suppliers interact with only one of them. Although it is quite easy for a supplier to sell through a platform's agency channel, they must typically be invited to participate in the reselling channel. We develop a model of a powerful platform that can offer a supplier a two-part contract to induce it to participate in its reselling channel instead of its agency channel. When the supplier sells through the platform's agency channel, we find that if the competition among the traditional resellers is at least moderate and the on-line platform is a close enough substitute for traditional resale channel, then the equilibrium quantities sold through the on-line and traditional channels are both larger than the first best quantities. In contrast, under the equilibrium reselling contract between the platform and the supplier, the quantities sold through the on-line and traditional channels are never both above their respective first-best quantities simultaneously. As a consequence, we find that when competition among traditional resellers is at least moderate, and both the commission rate and the substitutability between the on-line platform and the traditional resale channel are sufficiently high, there is a Pareto improving reselling contract between the supplier and the platform.