Applying a platform to expand sales

Abstract

Manufacturers often try to expand sales by making their products available on an intermediatory platform. This article examines fundamental issues related to firms’ decisions to use a platform. Due to favorable services that are provided by the platform, consumers would rather purchase from the platform than directly from the firms. In the absence of a platform, some would purchase from the firms while others would make no purchase. With a platform, on the other hand, strong-preference consumers will continue to purchase from the firms, since they are not within the platform’s target market; low-preference consumers will continue to make no purchase; only moderate-preference consumers will switch from direct purchase to platform purchase. Moreover, the firm-direct sales prices are greater than the platform sales price, so the firms take advantage of strong-preference consumers to compensate for the fee of the platform. We also show that the optimal size of the platform is related to consumers’ evaluation of the products, the platform characteristics, and consumers’ disutility of buying a non-ideal product.

Keywords:

• Pricing theory
• customer behavior
• intermediary platform
• bargaining
• two-sided market

Notes

1 The channel literature generally allows bargaining between the platform and firms (Inderst & Wey, 2003; Iyer & Villas-Boas, 2003; Inderst & Shaffer, 2007; Guo & Iyer, 2013).

2 For a comprehensive review of the literature on two-sided markets, see Rochet and Tirole (2006) and Rysman (2009).

3 Though operating a retail store requires costs in rents and operating an online store requires designing and maintenance costs, these costs will not affect the relative prices set by the two firms. In our model, we assume that the firms will always make direct sales available; therefore, this cost will not affect a firm’s decision to use a platform since they have to incur this cost regardless of their decision on a platform.

4 This model only studies optimal strategies for a given type of platform. The platform’s decision on the choice of attribute is well worth exploration in future research.

5 Consumers’ utility of the purchase depends on the match between the purchased product and consumers’ preference, thus it is assumed to be dependent on consumers’ distance from the firm, not from the intermediary platform.

6 This price setting process is consistent with Li, Lin, Xu, and Swain (2015) that assume the manufacturer decides the price under a platform-selling agreement.

7 If $\frac{p_i^I-p_i}{a}<\frac{r-p_i}{t},$ since $Q_i=\frac{r-p_i}{t}$ and $Q_i^I=\frac{r-p_i}{t-a}-b,$ consumers in $(\frac{r-p_i}{b},b)$ will not make any purchases. If $\frac{p_i^I-p_i}{a}>\frac{r-p_i}{t},$ then $Q_i=\frac{p_i^I-p_i}{a}.$ If $\frac{p_i^I-p_i}{a}>b>\frac{r-p_i}{t},$ then $Q_i^I=\frac{r-p_i}{t-a}-\frac{p_i^I-p_i}{a}$ and there will not be a gap between Q_i and $Q_i^I;$ if $b>\frac{p_i^I-p_i}{a}>\frac{r-p_i}{t},$ then $Q_i^I=\frac{r-p_i}{t-a}-b$ and consumers in $(\frac{p_i^I-p_i}{a},b)$ will not make a purchase.

8 ${\widehat{x}}_{12}-{\widehat{x}}_1=\frac{p_2-p_1^I+t}{2t-a}-\frac{r-p_1^I}{t-a}=\frac{p_2(t-a)-p_1^I(t-a)+t(t-a)-r(2t-a)}{(2t-a)(t-a)}.$ Since $r<\frac{t-a}{2},$ we have ${\widehat{x}}_{12}-{\widehat{x}}_1>\frac{p_2(t-a)+p_1^{I}t+\frac{1}{2}a(t-a)}{(2t-a)(t-a)}>0.$

Additional information

Funding

The National Natural Science Foundation of China (71702109 and 71801155)); The Natural Science Foundation of Guangdong Province, China (2017A030310566); The Research Foundation of Department of Education of Guangdong Province, China (2018WTSCX124); the Research Foundation of China Center for Special Economic Zone Research, Shenzhen University.