Marketplace Operators Can Induce Competitive Pricing

Abstract

As e-commerce marketplaces continue to grow in popularity, it has become increasingly important to understand the role and impact of marketplace operators on competition and social welfare. We model a marketplace operator as an entity that not only facilitates third-party sales but can also choose to directly participate in the market as a competing seller. We formalize this market structure as a price-quantity Stackelberg duopoly in which the leader is a marketplace operator and the follower is an independent seller who shares a fraction of their revenue with the marketplace operator for the privilege of selling on the platform. The objective of the marketplace operator is to maximize a weighted sum of profit and a term capturing positive customer experience, whereas the independent seller seeks solely to maximize their own profit. We derive the subgame-perfect Nash equilibrium and find that it is often optimal for the marketplace operator to induce competition by offering the product at a low price to incentivize the independent seller to match their price.