Abstract

In this paper, we examine which of an agency selling or a wholesale contract offered by an e-commerce platform competing suppliers with typical dual-channel supply chains should adopt, where the products are not differentiated between a direct channel and an indirect platform channel, as in the case of digital goods. Specifically, we consider the situation in which each of two competing suppliers chooses its distribution strategy regarding whether it sells via a direct channel and/or an indirect channel via the platform. In addition, a supplier also chooses an agency selling contract or a wholesale contract if selling via the platform. Constructing and solving a game-theoretic model, we derive the primary result that, in equilibrium, one supplier sells products only via the direct channel, while the other supplier sells via both the direct channel and the platform channel through adopting a wholesale contract, even given the assumption of symmetric suppliers. This finding yields the managerial implication that a supplier selling products of the same quality between direct and platform channels in a competitive environment should not adopt agency selling but instead a regular wholesale contract when selling via a platform. Moreover, this finding reverses the conventional insight from existing models in previous studies that at least one competing supplier always adopts an agency contract when the suppliers are without their own direct sales channels.

Introduction

Currently, a wide variety of products ranging from technologically advanced industrial products to daily necessities including food and groceries are sold through online e-commerce platforms worldwide. Consequently, platform companies have experienced tremendous growth over the past decade. For example, Amazon announced that its net sales for 2020 increased 37.6% to $386 billion, compared with $281 billion in 2019. Reflecting the development of these e-commerce platforms, the US Department of Commerce has documented that online retail sales in the US were $791.7 billion in 2020, accounting for 14% of all retail sales in the US.1 Likewise, in China, where the development of e-commerce has been especially rapid, online retail sales reached 11.76 trillion yuan in 2020, accounting for some 30% of total retail sales.2 Accordingly, manufacturers increasingly regard these online e-commerce platforms as one of their essential sales channels.

While online retailers have typically played the role of simple resellers in the past, the rapid adoption of online shopping by consumers has induced major platform companies, including Amazon in the US, Taobao in China, and Flipkart in India, to introduce a sales format known as marketplace in addition to their traditional reseller format. Accordingly, when selling products or services through an online platform, a supplier needs to select between a wholesale contract or an agency contract, depending on whether the supplier wishes to sell products wholesale to the platform or use its marketplace. The essential difference between the two contracts is who has the right to determine the retail price. With the wholesale contract, while a supplier determines the wholesale price of its products, the platform company determines the retail price. Conversely, the retail price decision is delegated to the supplier in the agency contract, such that the supplier directly determines the retail price of its products based on the revenue-sharing rules as determined by the royalty rates and commission fees set by the platform. A major benefit of agency selling to the supply chain is that it resolves the problem of double marginalization, unlike a wholesale contract, and thereby prevents a reduction in the transaction quantity.

Conclusions

Currently, many manufacturing companies are not only utilizing rapidly growing e-commerce platforms as important sales channels, but also they are opening their direct channels and selling directly to end-consumers using advanced IT technologies. Given that many suppliers are now using such dual-channel supply chains, this paper investigates whether a wholesale contract or an agency contract offered by an e-commerce platform is chosen by competing suppliers, in the situation where products are undifferentiated between the direct channel and the indirect platform channel, as is typically the case of digital goods.

The key result from our model is that if there is no differentiation between channels such that consumers perceive the direct and platform channels as substitutable, then neither of the competing suppliers chooses the agency contract. This result holds regardless of how much the platform increases the suppliers’ share of profits by lowering its royalty rate and thereby making the agency contract more profitable to them. This yields the managerial implication that a supplier selling products of the same quality across channels, such as digital goods in a competitive environment, should adopt a regular wholesale contract, not an agency contract when selling through a platform. Intuitively, if a supplier adopts a wholesale contract, this appears undesirable for the supplier because the problem of double marginalization is likely to occur. However, our results lie contrary to this intuition. Moreover, it is also a notable result that even though suppliers are assumed to be symmetric regarding demand and cost conditions in our model, their distribution strategies emerging in equilibrium are asymmetric. These asymmetric distribution channel strategies allow a supplier to differentiate itself from the rival supplier if the former sells through the platform. Because we have obtained all our main results and implications clearly in analytical form solely by solving our model, we do not conduct numerical analysis in this paper.