Impact of Own Brand Product Introduction on Optimal Pricing Models for Platform and Incumbent Sellers

Sales on the e-commerce platform in the United States have experienced explosive growth and are projected to surpass 740 billion in 2023. The expansion of the platform’s traditional role as a reseller into an online marketplace and the introduction of its own brand products have stoked a huge fear among the incumbent sellers. The platform’s unfair anti-competitive practice further aggravates the situation. Consequently, politicians and regulators have proposed prohibiting platforms from introducing own brand products in order to protect the incumbent sellers. This study addresses two questions of critical interest to both the policy makers and the incumbent sellers. First, how does the platform’s introducing its own brand product affect the incumbent sellers? Second, how effective is the proposed policy in terms of protecting the incumbent sellers? We examine the impact of the platform’s own brand introduction on the incumbent sellers under two prevailing sell-on and sell-to pricing contracts. We find that the proposed legislation “that prohibits platforms from both offering a marketplace for commerce and participating in that marketplace” does not have the desired outcome of helping the incumbent sellers. Instead, it forces the platform to adopt only the sell-to contract with the own brand introduction that hurts the sellers under most market conditions. Interestingly, when the own brand introduction is banned under the sell-to contract, the incumbent sellers can be better off because the platform’s strategic reaction to the enforcement can lead to the best scenario for the incumbent sellers. If the ban is imposed on both the sell-on and sell-to contracts, the platform’s best response is to add another new brand competing with the incumbent sellers, which can also help the incumbent sellers, however, not as much as in the case of the enforcement only under the sell-to contract