Abstract

The increasing prevalence of online marketplaces has induced many suppliers to sell directly on them, which causes potential threats to small- and medium-sized e-tailers. Considering e-tailers’ broader question of how best to counteract these marketplaces, we consider three of online sales modes, namely, the traditional, consignment, and in-marketplace selling modes. In particular, we investigate the interaction between a supplier’s strategy for introducing a marketplace channel and an e-tailer’s choice of selling mode. Our analysis reveals that the e-tailer’s selling mode choice depends not only on the performance of both the supplier and the marketplace but also channel competition. In general, the e-tailer prefers the in-marketplace selling mode with a higher marketplace service level and the consignment mode with higher supplier selling efficiency. If a marketplace channel exists, traditional reselling is a better choice when both the marketplace service level and the supplier selling efficiency are restricted to the middle range. The underlying mechanism is that traditional reselling is less negatively affected by the competition effect. Finally, we find that the supplier wants to eschew the marketplace channel and strategically induce the e-tailer to sell through it even though the marketplace service level is relatively high. This research provides guidance not only for the supplier’s channel choice but also for the small- and medium-sized e-tailers’ choice of selling mode when encountering the online marketplace.

Introduction

Online retailing has grown rapidly in recent decades, and online marketplaces (marketplaces, hereafter) play a critical role. As of June 2022, Amazon accounted for 37.8 percent of the U.S. e-commerce market, making it by far the leading online retailer in the country1. A survey in China shows that in the second quarter of 2022, Tmall and JD.com, two online marketplaces in China, accounted for 94.1% of total online retail sales. However, the market shares of other small- and medium-sized e-tailers amount to only 5.9%2. The increasing prevalence of marketplaces benefits in-marketplace shops in two ways. First, due to the large market share of marketplaces, shops in these marketplaces can take advantage of their consumer base. For example, GOME, a home appliance e-tailer in China, has greatly expanded its potential online consumer base since entering Amazon3 and Tmall, which we refer to as the market expansion effect. In addition, with the rapid development of marketplaces, more high-quality services are being provided for in-marketplace shops. These services include but are not limited to promotion (Yang et al., 2006), return services (Yan et al., 2018), and logistics (Qin et al., 2021). For example, the safe return policies and fast delivery of Amazon have helped it effectively attract consumers and charge higher sales prices. JD.com has built its own logistics system and offers high-quality logistics services, such as “۲۱۱-limited-time delivery”, which makes it possible for the shops to demand a price premium on the goods sold via its system. In this paper, we refer to the price premium due to the marketplace’s superior service as the service premium effect.

The advantages of the market expansion and service premium effects have led many suppliers to enthusiastically embrace the marketplace channel. In 2022, some suppliers of international high-end brands, such as Porsche, LVMH and Gucci, launched flagship shops on Tmall to directly reach their consumers. However, some suppliers, such as book and record suppliers, have not introduced the marketplace channel. A survey shows that 100% of the surveyed manufacturing firms expressed a willingness to embrace the marketplace, but only 37.05% of them had introduced a marketplace channel4. The reason for this can be attributed to suppliers’ distance from the end market and lack of experience in collecting market information, marketing planning, and aftersales management. Even so, many consumers prefer to purchase from suppliers’ online stores over e-tailers. The reason can be attributed to their concerns about product freshness and genuine security, which can be guaranteed in factory-direct sales if the supplier is expert in direct selling. As a result, sales efficiency has become a key factor for suppliers to consider when entering online marketplaces.

Analysis of overall system equilibrium

We now come to the very first stage, which involves whether the supplier should introduce the marketplace channel and how this decision influences the e-tailer’s selling mode choice. We derive the answer directly by comparing the supplier’s profits in two cases where she introduces (does not introduce) the marketplace channel when the e-tailer can (cannot) gain a higher payoff if she joins in the marketplace. The following result provides the equilibrium strategies of the two channel members.