Spillover Effect of Consumer Awareness on Third Parties’ Selling Strategies and Retailers’ Platform Openness

Abstract

Global e-commerce sales have experienced unprecedented growth for the past years and have reached over $2 trillion annually. One interesting phenomenon along with this remarkable growth is that giant online retailers, such as Amazon.com in the United States and JD.com in China, open their platforms and allow third-party sellers to offer products there, thus inviting competition. We explore why an online retailer would open its platform and why a third-party seller would join the platform. We highlight the role of a spillover effect that, when the third-party seller joins the retailer’s platform, more consumers become aware of the third-party seller’s existence and its products which are not even listed on the retailer’s platform. We characterize how the third-party seller’s optimal selling strategies should vary with and how the retailer’s openness decision should be determined by the extent of the spillover effect and the retailer’s initial awareness advantage. Compared with the case without a spillover effect, the spillover effect makes the retailer less likely to open its platform, but it makes the third-party seller more likely to sell identical products on an open retailer platform; the spillover effect always (weakly) benefits the third-party seller, but it does not necessarily hurt the retailer.