Friday, 29 March 2019: 9:50 AM
Online marketplaces, where consumers can purchase from a variety of retailers on one website, have become an integral part of many eCommerce sellers' businesses. The most prominent examples of online marketplaces are eBay, Amazon Marketplace, Google, Taobao (China) and Flipkart (India). In this theoretical article, I consider a theoretical setting in which firms can sell their products through an online marketplace or through their own websites. On one hand, selling through an online marketplace expands a firm's reach to more customers. On the other hand, starting a website can help the firm to increase the perceived value of its product, that is, to build brand equity. My research questions are: i) Should a firm sell its product through an online marketplace (Amazon) or through its own branded website, and at what price? (ii) As the market becomes more competitive, will the fraction of firms that choose Amazon in equilibrium increase or decrease? The answer to the first question depends on the value differential (the increase in the perceived value of the product shall the firm start its own website) as well as on the composition of firms. The value differential, obviously, increases the attractiveness of the "start your own website" strategy. As to the composition of firms, I find that when the fraction of firms that sell through Amazon is large, the firms that sell through their own websites price aggressively. When this fraction is small, the firms that sell through their own websites price high and serve a smaller number of customers. To answer the second question, I endogenize the fraction of firms that sell through Amazon. Interestingly, I find that this fraction decreases as the market becomes more competitive.