Oligopolistic Competition in Online Marketplaces : Equilibrium Analysis and System Coordination

Two-sided marketplaces have grown rapidly over recent years and are ubiquitous in daily life. One important challenge is to design the marketplace to support the sustainability and efficiency of the ecosystem. This paper investigates the roles of selling formats in a two-sided marketplace with many sellers selling substitutable products on a common retailing platform. We formulate the strategic interactions between sellers and the platform in a supply function competition framework, in which each seller offers a schedule of quantity and payment that is a general function of quantities. We show that a contribution-based model (CBM), whereby the payment for each seller is based on the seller's contribution, is the only equilibrium for the supply function. We also show that the CBM results in a coordinated system achieving the first-best outcome, which is not attained under the other two widely observed schemes, reselling and agency selling. We propose a variant of CBM that yields a stable, economical, coordinated, and individually aligned outcome for all firms in the marketplace. Our findings could provide useful guidance for the design of strategic partnerships between firms in a two-sided marketplace